Antiturst and UCL in the News
From the May 2015 E-Brief
U.S. Supreme Court Reject Preemption Challenge to Application of State Antitrust Laws in Natural Gas Market
Traditionally, the three segments of the natural gas market--extraction, interstate transport for the purpose of wholesale, and local retail sales--have been regulated by a dual, but mutually exclusive, system of federal and state oversight. The drilling and retail sales segments fell squarely within state jurisdiction, while the wholesale and transport business was the exclusive providence of the Federal Energy Regulatory Commission (FERC). In Oneok, Inc. v. Learjet, Inc., 575 U.S. ___ (2015), the U.S. Supreme Court held that the federal regulatory structure did not preempt state antitrust claims.
FERC generally relies on competitive forces, rather than rate-setting, to keep wholesale prices of natural gas reasonable. It does so by permitting interstate pipeline companies to sell to both local distributors for resale and to local businesses and other institutions for direct consumption, provided they arrange for their own transportation of the gas. Prices for these sales are generally derived from indices that reflect voluntarily reported sales in comparable markets. In 2003, FERC released a report finding that these indices were inaccurate because many traders had reported fabricated data and sham sales. Plaintiffs, a group of businesses and institutions that bought natural gas from the pipelines for direct consumption, sued a group of the pipelines asserting violations under various states' antitrust laws. The plaintiffs claimed they paid artificially inflated prices on their purchases of natural gas for their own consumption due to the manipulated indices.
The Natural Gas Act, 52 Stat. 821, gives FERC the authority to regulate rates in connection with the interstate transportation of natural gas, commercial sales of natural gas for resale, and the companies engaged in those activities. The defendants argued, and Judge Philip M. Pro of the U.S. District Court for the District of Nevada agreed, that this grant of authority pre-empted the field. Accordingly, Judge Pro dismissed the state antitrust claims.
The Ninth Circuit reversed, finding that because the pipelines' conduct affected prices both for wholesale sales, which fall within FERC's jurisdiction, and sales for direct consumption, which are subject to the states' jurisdiction, federal law could not pre-empt the entire field of regulating these price indices. The Supreme Court, in a 7-2 decision, affirmed the Ninth Circuit's ruling. In the majority opinion, Justice Stephen Breyer emphasized that the Court has repeatedly found that Congress drafted the Natural Gas Act "with meticulous regard for the continued exercise of state power." Such meticulous reservation of state power, Justice Breyer writes, warrants caution in any case determining the scope of field pre-emption.
In reaching this result, Justice Breyer applied a purpose-oriented analysis of the state laws in issue, finding they were drawn to "background market conditions," which the states may establish for themselves, rather than targeting natural gas wholesales and the parameters of such sales directly. Justice Antonin Scalia dissented, in an opinion joined by Chief Justice John Roberts, rejecting that reasoning. Justice Scalia argued instead that it is the activity targeted by the state regulation, not the effect of that activity, that defines the scope of the field to analyze for pre-emption purposes, and the activity at issue here is setting prices for sales by the interstate pipelines, which is the target of FERC's jurisdiction. The Court's holding rejects this "platonic ideal" that an activity in the natural gas market must be either exclusively state or exclusively federal jurisdiction, leaving conduct with a dual effect open to concurrent jurisdiction.
This case represents a victory for the scope of state antitrust enforcement, as it pushes the role of state law further up the natural gas supply chain. The case also presents a challenge for interstate pipeline companies, who must now ensure that conduct relating to sales for direct consumption complies with the sometimes disparate antitrust laws of each state in which it does business. It remains to be seen whether Justice Breyer's purpose-oriented analysis will have broader implications in future field pre-emption jurisprudence.
The Court left open two avenues for retreating from this expanded role for state law. First, the case did not consider whether the state laws were pre-empted under a conflict pre-emption theory, which may be addressed on remand or in subsequent cases. Second, the Court indicated that a "specific FERC determination" that its jurisdiction pre-empted state antitrust laws in this area, which would have to rise above implication from regulations of the activity at issue, could be entitled to deference.
Until those issues arise, states may enjoy an expanded degree of self-determination in the ground rules of the natural gas marketplace, and direct purchasers of natural gas may seek compensation for artificially inflated prices under state laws.
California Department of Justice, Antitrust Section
The views expressed are of the author only and do not represent the views of the California Department of Justice.
In Re Cipro Cases I & II: California Supreme Court Holds Pharmaceutical Pay-for-Delay Settlement Violates California Antitrust Law
On May 7, 2015, the California Supreme Court in In re Cipro Cases I & II, S 198616 On May 7, 2015, the California Supreme Court in In re Cipro Cases I & II, S 198616, unanimously affirmed consumers' right to challenge pharmaceutical pay-for-delay settlements under California competition law, holding that "[p]urchasing freedom from the possibility of competition, whether done by a patentee or anyone else, is illegal." The Court held that "[a]n agreement to exchange consideration for elimination of any portion of the period of competition that would have been expected had a patent been litigated is a violation of the Cartwright Act." The resounding opinion, written by Justice Kathryn Werdegar, reversed a grant of summary judgment for pharmaceutical giants, finding that "[p]arties illegally restrain trade when they privately agree to substitute consensual monopoly in place of potential competition...".
The case centered on Bayer AG and Bayer Corporation's ("Bayer") marketing of Cipro, an antibiotic that has been one of the most-prescribed and best-selling drugs in the world. In 1997, Bayer allegedly paid $398.1 million to Barr Pharmaceuticals (since acquired by Teva Pharmaceutical Industries Ltd) in exchange for Barr's agreement to postpone marketing a generic version of Cipro until Bayer's patent on the drug expired in 2003. In doing so, the agreement preserved Bayer's monopoly and ability to charge supracompetitive prices at the expense of consumers. This 1997 settlement between Bayer and Barr prompted a flood of state and federal antitrust lawsuits, which culminated in Thursday's decision in favor of the plaintiffs.
The case illustrates the conflicting policies between antitrust and patent law. The purpose of the Cartwright Act is to "prohibit against agreements that prevent the growth of healthy, competitive markets for goods and services...", while the goal of patent laws is to promote invention and new discoveries by granting investors limited statutory monopolies. To accommodate both bodies of law, the Court concluded that the so-called "scope of the patent test" (which considers such factors as whether the patent was fraudulently obtained, the patent enforcement suit was objectively basis, or the agreement unreasonably restrains competition beyond the temporal scope of the patent) for determining whether antitrust liability may apply must be rejected because it "accords excess weight to the policies motivating patent law" and "gives insufficient consideration to the concerns animating antitrust law." In this regard, the Court's analysis is consistent with the U.S. Supreme Court's decision in FTC v. Actavis, which rejected the scope of the patent test on similar grounds.
In Cipro, the Court set out a four-part test to identify whether the parties' settlement agreement eliminates competition beyond the point at which competition would have been expected in the absence of an agreement. The initial burden of proof rests with plaintiffs, who must establish: (1) the settlement includes a limit on the settling generic challenger's entry into the market; (2) the settlement includes cash or equivalent financial consideration lowing from the brand to the generic challenger; and the consideration exceeds (3) the value of the goods and services other than any delay in market entry provided by the generic challenger to the brand, as well as (4) the brand's expected remaining litigation costs absent settlement. Upon plaintiffs' showing that the agreement is an anticompetitive restraint, defendants may then attempt to rebut the presumption of illegal antitrust activity with evidence of procompetitive justifications.
The California Supreme Court is the first state high court to tackle the legality of pay-for-delay settlements under state antitrust law. The Court's decision in Cipro will put much greater scrutiny on pharmaceutical drug company's patent settlements and resound to the benefit of consumers--a primary purpose of the Cartwright Act emphasized in the Court's opinion.
Cotchett, Pitre & McCarthy, LLP
From the April 2015 E-Brief
Ninth Circuit Affirms Grant of Summary Judgment in Defendants' Favor on Antitrust Injury-in-Fact
On February 27, 2015, the U.S. Court of Appeals for the Ninth Circuit issued an opinion in In re Online DVD-Rental Antitrust Litigation, Nos. 12-15705, 12-15957, 12-15996, 12-16010, 12-16036, 2015 WL 845842, ___ F.3d ___ (9th Cir. Feb. 27, 2015), affirming the district court's grant of summary judgment against class plaintiffs who failed to demonstrate a triable issue of fact on their antitrust standing. The plaintiffs, individuals who represented a certified class of Netflix subscribers, alleged that Netflix and Walmart had illegally allocated and monopolized the online DVD-rental market in violation of Sections 1 and 2 of the Sherman Act. They claimed that they paid supracompetitive prices for one of Netflix's subscription plans as a result of the defendants' anticompetitive conduct. The district court rejected that contention, concluding that the plaintiffs failed to raise a triable issue as to whether they suffered antitrust injury-in-fact. On appeal, the Ninth Circuit affirmed the decision of the district court. The Ninth Circuit issued its formal mandate on March 23, 2015.
Netflix, the largest player in the market for online DVD rentals, offered subscription plans that allowed customers to rent a certain number of DVDs at a time. Under Netflix's "3U" plan in 2003, customers could rent three DVDs for $19.95 per month. Netflix increased that price to $21.99 per month in June 2004. In 2003, Walmart began to offer its own 3U plan for $19.95 per month. Blockbuster did the same in August 2004, offering a 3U plan plus two free coupons per month for in-store rentals for $19.99. Despite offering similar plans at comparable or less expensive pricing, Walmart and Blockbuster never had the market share of Netflix. In mid-2004, Netflix had over 2 million subscribers, 5 times more than Blockbuster and 33 times more than Walmart's 60,000 subscribers. Between June 2003 and March 2005, Walmart gained an average of 5,000 subscribers each quarter, while Netflix increased its customer base by 250,000 subscribers per quarter. Netflix never reduced its 3U price in response to these competitors. However, in apparent response to rumors in October 2004 that Amazon intended to enter the market, Netflix reduced its price to $17.99 per month. Blockbuster followed suit, dropping its price to $17.49 and later to $14.99, while Walmart cut its price to $17.49. Netflix did not reduce its price again until August 2007, when it lowered its 3U price to $16.99 per month.
The rumors of Amazon's plan to enter the online DVD-rental market prompted Netflix's CEO Reed Hastings to meet with Walmart's CEO John Fleming. Hastings testified that he hoped to form a partnership between the two companies that would strengthen Netflix's position before Amazon entered the market. The two CEOs met on October 27, 2004 but did not reach an agreement. Around the same time, Walmart was examining other strategic options, but concluded that none would be profitable. Faced with rising loses and declining revenue, in early January 2005 Walmart made the decision to exit the online DVD rental market. Unaware of that decision, however, Hastings continued to pursue a strategic relationship with Walmart.
The two CEOs reached a verbal agreement on March 17, 2005, which included several key terms. First, Walmart would transfer its rental subscribers to Netflix, where they would retain their rental queues and be offered the same subscription price for one year. Second, Walmart would promote Netflix's business on its website. Third, Netflix would pay $36 for each new subscriber from Walmart's referrals, as well as a 10% revenue share for each Walmart subscriber who transferred to Netflix. Finally, Netflix would promote Walmart's DVD sales business. These terms were later incorporated in a "Promotion Agreement" that was publicly announced on May 19, 2005. Notably, the Promotion Agreement continued to permit Walmart to offer an online DVD-rental service, did not preclude Netflix from selling DVDs, and did not contain a covenant not to compete. Although Walmart exited the online DVD-rental market, Amazon did not enter it. When Blockbuster filed for bankruptcy in September 2010, Netflix became the sole dominant competitor with more than 90% of the market.
The plaintiffs alleged that the Promotion Agreement reflected an illegal allocation of the online DVD-rental market. They brought claims for unlawful market allocation under Section 1 of the Sherman Act and monopolization, attempted monopolization, and conspiracy to monopolize under Section 2 of the Sherman Act. The district court certified a litigation class including any "person or entity in the United States that paid a subscription fee to Netflix" between May 19, 2005 and December 23, 2010. It then granted Netflix's motions for summary judgment on all claims, concluding that there was no per se antitrust violation and that the plaintiffs lacked standing because they had not raised a triable issue on antitrust injury-in-fact.
The Ninth Circuit did not reach the merits of the antitrust claims, but affirmed the district court's grant of summary judgment on the standing question. The plaintiffs' theory of antitrust injury-in-fact was that they paid supracompetitive prices for their Netflix subscriptions after Walmart exited the market, because Netflix would have reduced its price to $15.99 absent the Promotion Agreement. The Ninth Circuit rejected that argument, concluding that the plaintiffs had not adduced evidence to raise a triable issue of fact that Netflix would have reduced its prices. According to the Ninth Circuit, "[t]he undisputed record belies this assertion," because Netflix had never lowered its 3U subscription price in response to Walmart or Blockbuster (which had objectively posed a greater competitive threat), and in fact Netflix had raised its price to $21.99 in June 2004 despite competition from those two companies.
The court found that the plaintiffs' evidence did not support their theory of injury. Walmart's online DVD-rental business was lagging, and Netflix, Blockbuster, and Amazon did not view Walmart as a competitive threat. While the plaintiffs had proffered internal Netflix documents and published news articles to suggest that Netflix and others viewed Walmart as a true competitor, those documents were written before Walmart actually entered into the market and failed to perform. The plaintiffs submitted internal Walmart documents touting its own success, but the court found that these documents were promotional and motivational pieces, containing "language best described as puffery," and were not based on hard market data. Thus the Ninth Circuit concluded that, "much of the Subscribers' documentary evidence actually supports Netflix's position and convincingly reveals that Walmart did not view itself and was not viewed by others as a competitive threat in late 20004 and early 2005."
Finally, the Ninth Circuit concluded that the plaintiffs' unsupported expert testimony was "contrary to the undisputed market facts." The expert opinions speculated that Walmart had the potential to remain in the online DVD-rental market as a result of its general retail strength, but they were not tethered to Walmart's actual performance in that market. In addition, the court explained that the expert testimony failed to address the fact that the Promotion Agreement did not preclude Walmart from renting DVDs. In sum, the Ninth Circuit affirmed the grant of summary judgment, upholding the district court's determination that no reasonable juror could conclude that Netflix would have lowered its price for a 3U monthly subscription to $15.99 in response to Walmart, but for the Promotion Agreement.
Aaron M. Sheanin
Pearson, Simon & Warshaw, LLP
U.S. District Court for the Eastern District of New York Rules American Express Violated Antitrust Laws
In United States of America v. American Express Company, E.D.N.Y. case no. 10-cv-4496 (E.D.N.Y. Feb. 19, 2015), the United States District Court for the Eastern District of New York ruled that American Express's "anti-steering" rules preventing merchants from influencing their customers' payment choices violated Section 1 of the Sherman Antitrust Act. In the 150-page opinion, Judge Nicholas G. Garaufis held that American Express' policies aimed at keeping customers from using other forms of payment "suppress[d] its network competitors' incentive to offer lower prices at the approximately 3.4 million merchants where American Express is currently accepted, vitiating an important source of downward pressure on [American Express's] merchant pricing, and resulting in higher profit-maximizing prices across the network services market." Attorney General Eric Holder praised the decision as "a triumph for fair competition and for American consumers… [b]y recognizing that American Express's rules harm competition, the court vindicate[d] the promise of robust marketplaces that is enshrined in our antitrust laws."
The contractual restraints at issue in the litigation were American Express' Non-Discrimination Provisions ("NDPs"). In practice, the NDPs operate to block AmEx-accepting merchants from encouraging their customers to use any credit or charge card other than an American Express card, even where that card is less expensive for the merchant to accept. As a result of this absence of steering, each of the credit card networks is essentially insulated from the downward pricing pressure normally present in a competitive market. If steering were permitted, merchants could influence their customers' choice of card use by offering discounts or other monetary incentives to customers who pay with a particular type of card, providing non-monetary benefits for using a lower-cost card, or displaying the logo of one brand more prominently than others. Under American Express's standard NDPs, however, a merchant is barred from doing any of these things.
These merchant restraints sever the essential link between the price and sales of network services by denying merchants the opportunity to sway their customers' payment decisions and thereby shift spending to less expensive cards. Indeed, the Court explained, "by disrupting the price-setting mechanism ordinarily present in competitive markets, the NDPs reduce American Express's incentive – as well as those of Visa, MasterCard, and Discover – to offer merchants lower discount rates and, as a result, they impede a significant avenue of horizontal interbrand competition in the network services market." Consequently, low-price business models are untenable, innovation is stifled, and merchants and consumers suffer from higher prices.
The decision will have several positive implications for merchants and consumers, including making it easier for smaller or newer rivals to compete with American Express, Visa, or MasterCard. Merchants will benefit by being able to offer discounts to shoppers using cards other than American Express and to post signs that specify which card they would prefer shoppers to use. Card networks will be incentivized to offer merchants lower rates in the hope of capturing additional share. Customers will benefit, in the short term, by taking advantage of the incentives offered by merchants in order to influence their card choice. In the long term, customers will benefit from lower retail prices, which the Court expects will result from merchants passing along some amount of the savings associated with declining swipe fees.
American Express released a statement expressing its "disappointment" in the ruling and announcing that it would appeal. American Express claims the decision would actually harm competition by further entrenching the two dominant payment networks, Visa and MasterCard.
Cotchett, Pitre & McCarthy, LLP
Northern District of California Rejects Motion to Dismiss Challenge to Alleged Nationwide Class Under California Law
In Fenerjian v. Nong Shim Company, N. D. Cal. case no. 13-cv-04115 (N.D. Cal. March 30, 2015) ECF no. 164, the Hon. William H. Orrick denied a motion to dismiss an alleged nationwide class under California law. Defendant Samyang Foods Company Ltd. ("Samyang") argued that the proposed nationwide class was unconstitutional because (1) the Cartwright Act conflicts with other states' law and (2) because the plaintiffs had not alleged sufficient contacts between California and the claims of non-California plaintiffs. Judge Orrick rejected these arguments as inappropriate for a motion to dismiss, and better addressed at class certification.
Samyang is a Korean noodle manufacturer. In 2012, the Korean Fair Trade Commission ("KFTC") issued an order finding that Samyang and other Korean noodle manufacturers to increase the price of Korean noodles in Korea. Plaintiffs, indirect purchasers of Korean noodles asserting claims under the Cartwright Act and other state laws, alleged that Samyang and co-conspirators conspired to raise the price of Korean noodles in the United States.
While it is sometimes appropriate to determine at the pleadings stage whether a plaintiff can maintain a nationwide class under California law, Judge Orrick cited to Mazza v. Am. Honda Motor Co., 666 F.3d 581, 589-594 (9th Cir. 2012) in holding that "this question is more appropriately addressed here in connection with the class certification process." The Court held that Samyang's motion was procedurally improper because Samyang did not dispute that the indirect purchaser plaintiffs could assert a claim under the Cartwright Act on behalf of California residents. The question of whether the indirect purchaser plaintiffs' Cartwright Act claims could extend to out-of-state residents was more appropriate for resolution "at class certification when the parties know (i) which other states are at issue, (ii) what the laws of those states are, and (iii) what the contacts between the claims of plaintiffs from those states and California are." If the indirect purchaser plaintiffs meet their burden of showing sufficient contacts, the burden will then shift to Samyang to show that California's government interest test directs that foreign law, rather than California law, should apply to the claims. Finally, Judge Orrick noted that because of the indirect purchasers had asserted a nationwide claim under the Sherman Act, deferring the resolution of the scope of the Cartwright Act claims until class certification would have no effect on discovery or the cost of the litigation.
Cotchett, Pitre & McCarthy, LLP
From the March 2015 E-Brief
U.S. Supreme Court Holds State Boards Need Active Supervision to Invoke Antitrust Shield
On February 25, 2015, the United States Supreme Court ruled against the North Carolina State Board of Dental Examiners (“Board”) in their crusade to prevent lower cost, nondentist competitors from offering teeth-whitening services. North Carolina State Bd. of Dental Examiners v. FTC, 574 U.S. ___ (2015) (“Bd. of Dental Examiners”). By a 6-3 vote, the Justices rejected the Board’s argument that it was acting in the best interests of consumers when it directed nondentists to cease-and-desist their lucrative teeth-whitening services.
The case arose in 2010, when the Federal Trade Commission (FTC) filed an administrative complaint charging the Board – composed primarily of licensed, practicing dentists – with violating § 5 of the Federal Trade Commission Act. The FTC alleged that the Board’s concerted action to exclude nondentists from the market for teeth whitening services in North Carolina constituted an anticompetitive and unfair method of competition. The United States Supreme Court granted certiorari after the Court of Appeals for the Fourth Circuit affirmed the FTC in all respects.
The Board argued its members were invested by North Carolina with the power of the State and that, as a result, the Board’s actions were cloaked with Parker immunity. In Parker v. Brown, the Court had interpreted the antitrust laws to confer immunity on anticompetitive conduct by the States when acting in their sovereign capacity. See 317 U.S., at 350-351 (1943). The Court rejected the Board’s argument, however, because a nonsovereign actor controlled by active market participants – such as the Board – enjoys Parker immunity only if it satisfies two requirements: “first that ‘the challenged restraint … be one clearly articulated and affirmatively expressed as state policy,’ and second that the ‘policy … be actively supervised by the State.’” Bd. of Dental Examiners, citing FTC v. Phoebe Putney Health System, Inc., 568 U.S. ___, ___ (2013) (slip op., at 7) (quoting California Retail Liquor Dealers Assn. v. Midcal Aluminum, Inc., 445 U.S. 97l 105 (1980) (“Midcal”).
Because a controlling number of the Board’s decision makers were active market participants in the occupation the Board regulates, the Court held that the Board could invoke state-action antitrust immunity only if it was subject to active supervision from the State. That requirement, however, was not met. Although there are instances in which an actor can be excused from Midcal’s active supervision requirement, state agencies controlled by active market participants pose the very risk of self-dealing that Midcal’s supervision requirement was created to address. The need for supervision is manifest when a State empowers a group of active market participants to decide who can participate in its market and on what terms. Therefore, the Court held that if a state wants to rely on active market participants as regulators, it must provide active supervision in order for state-action immunity under Parker to apply.
The State argued that allowing this FTC order to stand will discourage dedicated citizens from serving on state agencies that regulate their own occupation. However, the Court’s holding is not inconsistent with the idea that those who pursue a calling must embrace ethical standards that derive from a duty separate from the dictates of the State.
Cotchett, Pitre & McCarthy, LLP
In St. Luke's, Ninth Circuit Affirms District Court Decision Rejecting Hospital-Physicial Group Merger
On February 10, 2015, the Ninth Circuit issued an important antitrust decision that provides significant guidance to lower courts (and to attorneys advising health care clients) regarding how to address mergers in the health care field, an area of increasing interest after the Affordable Care Act. In Nampa Inc. v. St. Luke’s Health Sys., Ltd., No. 14-35173 (9th Cir. Feb. 10, 2015), the Ninth Circuit affirmed the lower court’s finding after a trial that a hospital-physician group merger violated Section 7 of the Clayton Act.
In 2012, St. Luke’s Health Systems, a not-for-profit health care system which operated an emergency clinic in Nampa, Idaho, acquired Saltzer Medical Group, P.A. Saltzer was the largest multi-specialty physician group in Idaho and was the largest primary care physician (“PCP”) provider in Nampa. The combined entity had an 80% share of the PCPs in Nampa, but it did not require Saltzer physicians to refer patients to St. Luke’s Boise hospital or to use St. Luke’s facilities for ancillary services.
The FTC and the State of Idaho challenged the merger, alleging anticompetitive effects in the Nampa PCP market. After a five-week bench trial, the district court agreed with the defendant that the merger was intended primarily to improve patient outcomes, but it concluded that the same effects could have been achieved by other means. It held that the high post-merger market share could not be overcome and that the merger thus violated Section 7 of the Clayton Act. St. Alphonsus Med. Ctr. – Nampa Inc. v. St. Luke’s Health Sys., Ltd., 2014 WL 407446 (D. Idaho, Jan 24, 2014).
The Ninth Circuit reviewed the district court’s findings of fact for clear error and reviewed its conclusions of law de novo. It affirmed four findings: (1) the relevant geographic market was Nampa and not a broader area; (2) a prima facie case of anticompetitive effects resulted from the merger; (3) the defendant’s claimed post-merger efficiencies would not have a positive effect on competition; and (4) divestiture was the proper remedy.
As with most merger antitrust challenges, a key factual question was the relevant geographic market. There was no dispute that the relevant product market was adult PCPs. The Ninth Circuit affirmed the district court’s finding that the relevant geographic market was the city of Nampa, and not a broader area. In so doing, the Ninth Circuit expressly approved of the concept that in the health care context, the relevant buyers of health care are insurers rather than the individual consumers, and thus, the proper focus was how insurers would respond to a hypothetical SSNIP – “small but significant nontransitory increase in price.” Although they were not the relevant buyer, testimony of Nampa residents was nevertheless important as it established that they strongly preferred local PCPs, and insurers therefor could not market a health care network in Nampa that did not include local PCPs. In addition, because consumers pay only a small percentage of health care costs out of pocket and choose PCPs on non-price factors, a SSNIP would not change their behavior. The Ninth Circuit therefore accepted the district court’s finding that a hypothetical Nampa PCP monopolist could profitably impose a SSNIP on insurers.
Once the relevant market was defined as Nampa, there was no real question that the “extremely high” post-merger Herfindahl-Hirschman Index (HHI) established plaintiffs’ prima facie case of a Section 7 violation – St. Luke’s did not even dispute this. The Ninth Circuit also affirmed the district court’s finding that the combined St. Luke’s would likely use its market power to negotiate higher-reimbursement rates from insurers (i.e. raising prices).
St. Luke’s argued that post-merger efficiencies nevertheless justified the merger. Perhaps the most significant aspect of the Ninth Circuit’s decision is its strong doubt that proof of post-merger efficiencies can ever rebut a prima facie case of a violation of Section 7. In doing so, the court noted Supreme Court precedent casting doubt on the “post-merger efficiencies defense,” as well as the fact that none of the circuits that have acknowledged the possibility of such a defense had actually held that claimed efficiencies rebutted a prima face case. In its decision, the Ninth Circuit assumed the availability of an efficiencies defense, but it set a high bar: (i) such a defense must “clearly demonstrate” enhanced competition; (ii) proof of “extraordinary efficiencies” is required to offset anticompetitive concerns in concentrated markets; (iii) the asserted efficiencies must also be “merger-specific,” meaning they cannot readily be achieved without the loss of a competitor; and (iv) the asserted efficiencies must be verifiable and not based on speculation.
Applying these principles, the Ninth Circuit addressed St. Luke’s quality-based efficiency claim that it would better serve patients by providing physicians with access to an electronic medical records system. It found this assertion to be legally insufficient because the claimed efficiencies were not merger-specific, and, regardless, the Clayton Act does not excuse mergers that lessen competition simply because the combined entity can improve its operations. St. Luke’s assertion was also unsupported by any evidence that the merger would increase competition or decrease prices, and in fact the evidence was to the contrary.
Finally, the Ninth Circuit affirmed the district court’s finding that divestiture was the customary form of relief, Saltzer would likely be a viable competitor after the divestiture, and St. Luke’s suggested conduct remedy entailed too much judicial oversight.
In the current age of health care consolidation after the Affordable Care Act, St. Luke’s is critical reading for those providing advice on would-be health care mergers. Most significantly, in highly concentrated markets, the Ninth Circuit’s high bar (which may not be surmountable at all) will require that a merger be supported by clear and convincing evidence of efficiencies that are both concrete and merger-specific.
Geoffrey T. Holtz
First Circuit Upholds Certification of Nexium Purchaser Class and Rejects Argument that Injury Must Be Shown for Every Class Member
In In re Nexium Antitrust Litig. No. 14-5121 (Jan. 21, 2015), the First Circuit Court of Appeals, in a split decision, upheld the district court’s certification of a class of consumers and insurance companies who had purchased the acid reflux medication, Nexium. The First Circuit held that the certification was proper even though the class contained more than a small number of uninjured class members.
In their complaint, the plaintiffs alleged that the “pay for delay” arrangement between the defendant and generic drug makers violated the antitrust laws by keeping lower-priced generic drugs out of the market. The plaintiffs had proposed a class of purchasers that overpaid for Nexium as a result of the allegedly anticompetitive settlement arrangements.
Before the district court, the defendants had argued that the plaintiffs failed to prove through common evidence that each class member was injured. The defendants claimed plaintiffs had not defined a way of distinguishing between “injured” customers (those who would have purchased the generic alternative (and thus saved money)) and “uninjured” customers (those who were “brand loyal” and would have continued to purchase Nexium at full price). While the district court acknowledged that some members of the proposed class may not have suffered injury, it certified the class on the basis that the number of uninjured class members was de minimus (2.4%) and that the defendants’ expert had failed to reliably quantify the prevalence of the problematic uninjured subclass.
On appeal, the defendants argued the district court abused its discretion by certifying a class that included members not injured by the defendants’ conduct. The defendants claimed that that district court’s certification violated the Rule 23(b)(3) predominance requirement as the presence of uninjured class members would preclude the use of common proof at trial.
While the First Circuit acknowledged that the plaintiffs had not proposed a way of excluding uninjured class members, it held that this did not preclude development of a mechanism for preventing those uninjured by defendants’ conduct from recovering damages. The court suggested that, at the liability stage, the plaintiffs could request the presumption that consumers would have purchased the generic drug, or consumers could submit affidavits attesting to the fact that they would have bought the generic version.
Relying on Halliburton Co. v. Erica P. John Fund, Inc., 134 S.Ct. 2398 (2014), the court held that a class with uninjured members could be certified if there were only a de minimus number of uninjured members. The court found that the presence of a small number of uninjured class members would not overwhelm the common issues for the class. The court rejected defendant’s argument that Wal-Mart and Comcast necessitate that plaintiffs show every potential class member was harmed.
Judge William Kenyatta Jr.’s dissent disputed several of the majority’s holdings. The dissent noted that although it was only 2.4% of the class, the uninjured class members could total more than 24,000 – a fairly large number. In addition, the dissent criticized the majority for sua sponte suggesting methods for excluding uninjured class members (i.e. by affidavit). He also pointed to the fact that other circuits had rejected affidavits as an appropriate method for excluding members who did not belong in the class. The dissent finally noted that the majority’s approach may wrongly shift the burden from the plaintiffs to the defendants of establishing that class certification should not be granted.
Northern District of California Court Dismisses Claims that Google Foreclosed the Market for Internet Search for Lack of Antitrust Standing
In Feitelson v. Google Inc., No. 14-cv-02007 (N.D. Cal. Feb. 20, 2015), a putative class action, the court relied on principles of antitrust standing to dismiss a claim based on purchases of smartphones when the anticompetitive conduct alleged occurred in the market for internet searching.
Plaintiffs in Feitelson sought to represent a class of purchasers of Android OS mobile phones and tablets manufactured by companies who entered into allegedly anticompetitive contracts with Google. The contracts granted the manufacturers the right to preload Google applications to their phones for free. In exchange, the manufacturers agreed to preload Google as their phones’ default search engine. Plaintiffs alleged that these contracts violated the Sherman Act and California’s Cartwright Act because, they claimed, the contracts stifled innovation and caused them to pay supracompetitive prices for their phones. The contracts allegedly limited consumer choice and prevented Google’s competitors from offering to pay the manufacturers to act as their default search engine, stopping those manufacturers from passing on such payments to consumers in the form of lower phone prices.
Google moved to dismiss for failure to allege antitrust standing, and the Court granted the motion. In the Ninth Circuit, plaintiffs must show their injury occurred in the market where competition is being restrained to establish antitrust standing. Am. Ad Mgmt., Inc. v. Gen. Tel. Co. of California, 190 F.3d 1051, 1057 (9th Cir. 1999) (“Parties whose injuries, though flowing from that which makes the defendant’s conduct unlawful, are experienced in another market do not suffer antitrust injury.”). There is a “narrow exception” for plaintiffs whose injuries are “‘inextricably intertwined’” with the injuries of participants in the restrained market. Id. at 1057 n.5 (quoting Blue Shield v. McCready, 457 U.S. 465 (1982)).
The Feitelson Court held that plaintiffs’ claims failed this test. Their claims of stifled innovation, the Court held, were too conclusory and speculative – there was no indication that Google’s contracts prevented consumers from choosing among search products or competitors from innovating. Feitelson v. Google Inc., No. 14-cv-02007 at 9, 11.
The Court likewise rejected flawed plaintiffs’ argument that they suffered an antitrust injury by paying more than they should have for their Android devices. The anticompetitive conduct alleged (foreclosure of the search market) did not occur in the same market as the alleged injury (overpayment in the handheld device market). Id. at 10. Accordingly, consistent with American Ad Management’s requirement that the injury occur in the same market where competition was restrained, the Court held plaintiffs’ injuries were too remote to establish antitrust standing. Id. The Court declined to apply the inextricably intertwined exception, which it described as “exceedingly narrow,” because plaintiffs’ alleged injuries were not the necessary means by which Google allegedly accomplished its goal of foreclosing competition in the search market. Id. at 10.
The Northern District of California has discussed question of whether consumers have antitrust standing to bring claims for purchases of a finished product based on anticompetitive conduct in the market for an integrated component in other cases. Compare Dynamic Random Access Memory (DRAM) Antitrust Litigation, 516 F. Supp. 2d 1072, 1089-91 (N.D. Cal. 2007) (Hamilton, J.) (dismissing claims brought by computer purchasers alleging a conspiracy to fix the price of the dynamic random access memory (DRAM) component in their computers for lack of antitrust standing), with, e.g., In re Flash Memory Antitrust Litig., 643 F. Supp.2d 1133, 1154 (N.D. Cal. 2009) (Armstrong, J.) (denying motion to dismiss because plaintiffs alleged sufficient facts to show their purchases of NAND flash memory-based products were in the same market as NAND flash memory), and In re TFT-LCD (Flat Panel) Antitrust Litig., No. 07-1827, 2011 WL 6148677, at *1 (N.D. Cal. Dec. 7, 2011) (Illston, J.) (denying summary judgment based on lack of antitrust standing where plaintiffs’ claims were based on laptop, monitor, and television purchases containing allegedly price-fixed LCD panels because the LCD panel market and finished product market were inextricably linked). Feitelson’s conclusion that the purchasers in market for handheld devices do not have standing to bring claims based on antitrust violations in the market for those devices’ pre-installed search software contributes to this steadily evolving area of antitrust law.
Lee F. Berger and Danielle C. Doremus
Paul Hastings LLP
Central District of California Court Certifies "All Natural" Consumer Class
On February 23, 2015 United States District Court Judge Margaret Morrow certified an eleven-state class action in an “all natural” case against ConAgra Foods, Inc. The ruling is notable for at least three reasons. First, the Court declined to adopt the Third Circuit’s heightened ascertainability requirement and held that the class is ascertainable. Second, the Court found that plaintiffs made a sufficient showing that the materiality of the misrepresentations could be established by common proof. And third, the Court accepted plaintiffs’ expert evidence demonstrating that class-wide damages could be measured by calculating the portion of the price premium attributable to the “100% Natural” label that reflects a consumer’s belief that the product contained no genetically modified ingredients (“GMOs”).
Plaintiffs are consumers in eleven states who purchased Wesson brand cooking oils (“Wesson Oil”) labeled as “100% Natural.” In re ConAgra Foods, Inc., cv-11-05379-MMM, at p. 3 (C.D. Cal. Feb. 23, 2015) (“Opinion”). Plaintiffs allege that Defendant ConAgra Food, Inc. (“ConAgra”) deceptively and misleadingly marketed and labeled its Wesson Oils, made from genetically modified corn, soy and canola, as “100% Natural.” Plaintiffs filed a motion for class certification on May 5, 2014. On August 1, 2014, the Court denied the motion without prejudice and authorized plaintiffs to file an amended motion “address[ing] the deficiencies noted” in the order. In re ConAgra Foods, Inc., 302 F.R.D. 537, 581 (C.D. Cal. 2014). On September 8, 2014, Plaintiffs filed an amended motion for class certification.
Judge Morrow certified an eleven-stateclass action under Rule 23(b)(3), which included California. Judge Morrow did not address whether Wesson Oil is “100% Natural” or not. Rather, the Court’s decision was based on plaintiffs’ ability to meet the requirements of Rule 23(a) and 23(b)(3), particularly whether the class was “ascertainable,” and whether the plaintiffs could demonstrate that reliance, causation and damages could be proved with common evidence.
First, the Court held that members of the class are ascertainable under Rule 23(a). In doing so, Judge Morrow rejected the heightened ascertainability requirement set forth in the Third Circuit’s decision in Carrera v. Bayer Corp., 727 F.3d 300 (3rd Cir. 2013).
The Court recognized in its prior class certification order that, following Carrera, “district courts in this circuit are split as to whether the inability to identify the specific members of a putative class of consumers of low priced products makes the class unascertainable.” Opinion at p. 48. ConAgra argued that the class is not ascertainable because there is no way to identify consumers who purchased its products, at what sizes and at what prices, during the class period. Opinion at p. 47. The Court found that “ConAgra’s argument would effectively prohibit class actions involving low priced consumer goods – the very type of claims that would not be filed individually – thereby upending ‘[t]he policy at the very core of the class action mechanism.’” Opinion at p. 49. The Court further rejected ConAgra’s argument that the class is unascertainable because it includes uninjured class members. The Court found that “[b]ecause every putative class member has been exposed to the alleged misrepresentation, the fact that some class members may have not been injured by the ‘100% Natural’ claim does not render the class unascertainable.” Opinion at p. 49.
The Court next analyzed whether common issues predominate under Rule 23(b)(3). In its initial ruling on class certification, the Court found, on the record before it, that reliance and causation could not be determined on a classwide basis because plaintiffs had not provided sufficient evidence showing that the “100% Natural” misrepresentation was material and, therefore, “the issue of reliance ‘var[ies] from consumer to consumer’ and no classwide inference arises.” Opinion at p. 65 [citations omitted]. The plaintiffs submitted evidence in support of their amended motion demonstrating the materiality of the “100% Natural” misrepresentation by third party surveys. Opinion at p. 115. Among the evidence provided was ConAgra’s own market research showing that “consumers exposed to a ‘100% Natural’ or ‘Natural’ claim … generally consider the representation a significant factor in their purchasing decisions.” Opinion at p. 115. The Court concluded that the plaintiffs made a sufficient showing that the reasonable consumer would interpret the Wesson Oil labels to mean that the products do not contain GMOs. The Court then reasoned that the misrepresentation is material and, therefore, materiality could be proven on a classwide basis. Opinion at pp. 117-119.
Finally, the Court considered whether “damages are capable of measurement on a classwide basis.” Opinion at p. 122, citing Comcast v. Behrend, 133 S.Ct. 1426, 1433 (2013). The Court previously denied class certification, in part, because plaintiffs’ damages methodology was not connected to their theory of liability. Plaintiffs had submitted an expert declaration of economist Colin Weir setting forth a hedonic regression analysis calculating the price premium attributable to the “100% Natural” label. The Court rejected the analysis because it failed to calculate the portion of the premium attributable to the plaintiffs’ theory of liability: that the “100% Natural” label on Wesson Oils caused class members to believe the products contained no GMOs. Opinion at p. 122. In their amended filing, plaintiffs submitted an expert report of Dr. Elizabeth Howlett. Dr. Howlett proposed to use consumer surveys to calculate the percentage of the price premium attributable to the “100% Natural” label that reflects a consumer’s belief that the product contained no GMOs. Next, Dr. Howlett proposed to use the price premium attributable to the “100% Natural” label calculated by Weir, and multiply it by the percentage derived from her conjoint analysis. The Court held that “[s]uch a calculation would necessarily produce a damage figure attributable solely to ConAgra’s alleged misconduct – i.e., misleading consumers to believe that Wesson Oils contain no GMOs by placing a ‘100% Natural’ label on the products.” Opinion at p. 125. The Court concluded that Weir’s hedonic regression analysis combined with Dr. Howlett’s conjoint analysis satisfy the requirements of Comcast.
The Court declined to certify an injunctive relief class under Rule 23(b)(2), finding that there was insufficient evidence of a risk of future harm, or that there was a “sufficient likelihood” that consumers “will be wronged in a similar way” in the future. Opinion at p. 63.
Jill M. Manning
Steyer Lowenthal Boodrookas Alvarez & Smith LLP
Illinois District Court Is Unreceptive to Unfair Competition Law Claims Filed Against Dish Network
In United States v. Dish Network, LLC, Case No. 09-cv-03073 SEM-TSH (C.D. Ill., Feb. 17, 2015) (Dkt. 447) (hereafter “Dkt. 447 Opn.”), the Honorable Sue E. Meyerscough denied a request by the State of California to amend claims against Dish Network, LLC, to assert statutory violations of California Business and Professions Code § 17200 et seq. (Unfair Competition Law). The case involves enforcement actions by the Federal Trade Commission (FTC) and Attorneys General from California, Illinois, North Carolina and Ohio against Dish, two third-party telemarketing vendors and certain retailers, and arises from defendants’ efforts to telemarket Dish products and services to consumers. The FTC and the plaintiff States allege that Dish violated state and federal Do Not Call laws governing (1) outbound telemarketing calls to persons who have indicated that they do not want to receive such calls, and (2) outbound telemarketing calls that convey a pre-recorded message.
Previously in the case, Judge Meyerscough found that Dish had violated federal Do Not Call laws. The court held, among other things, that plaintiff “United States is entitled to partial summary judgment establishing Dish’s liability” for violating the Telephone Sales Rule, 16 C.F.R. §§
310.4(b)(1)(iii)(B) and 310.4(b)(1)(iv), with respect to certain outbound telemarketing calls Dish or its affiliates had made to consumers. Opinion entered Dec. 12, 2014 (Dkt. 445). The California Attorney General then asked for leave to amend its claims for relief under the UCL, in order to specifically allege that Dish “committed unfair competition” by violating the Telephone Sales Rule in the manner set forth in the court’s prior opinion. Judge Meyerscough denied California’s motion, holding that the requested amendment “would be futile.” Dkt. 447 Opn., at pp.4, 7.
In reaching this decision, Judge Myerscough appeared to equate the State of California’s UCL claim with a direct claim for violations of the federal Do Not Call law, rather than an independent claim under the UCL for unlawful business practices predicated on Dish’s violations of the federal law. According to Judge Myerscough, “[t]he [federal] Telemarketing Act authorizes California to bring an action ‘in an appropriate district court of the United States’ for violations of the [Telephone Sales Rule] under certain circumstances. 16 U.S.C. § 6103(a). Section 6103(d) of the Telemarketing Act, however, prohibits California from bringing an action for violations of the [Telephone Sales Rule] if an action is pending which has been brought on behalf of the FTC for the alleged violation:
“(d) Actions by Commission
Whenever a civil action has been instituted by or on behalf of the Commission or the Bureau of Consumer Financial Protection for violation of any rule prescribed under section 6102 of this title, no State may, during the pendency of such action instituted by or on behalf of the Commission…, institute a civil action under subsection (a) or (f)(2) of this section against any defendant named in the complaint in such action for violation of any rule as alleged in the complaint. 15 U.S.C. § 6103(d).”
Dkt. 447 Opn., at pp.4-5. Observing that the United States has brought claims in Counts I and III of the complaint for violations of the Telephone Sales Rule on behalf of the FTC, “[t]he Telemarketing Act, therefore, prohibits California from bringing an action for violations of the [Telephone Sales Rule] allege d in Counts I and III, at least while the United States claims are pending.” It at p. 5.
The California Attorney General argued that a savings provision in the Do Not Call statute, 15 U.S.C. § 6103(f)(1), allows California to bring an action to enforce its own consumer protection statute, the UCL. See 447 Dkt. Opn., at p.6. Section 6102(f)(1) provides:
“(f) Actions by other State officials
- Nothing contained in this section shall prohibit an authorized state official from proceeding in State court on the basis of an alleged violation of any civil or criminal statute of such State.” (emphasis added).
Judge Meyerscough declined to “comment on whether this savings provision would allow California to proceed with the proposed claim in California state court,” citing Rose v. Bank of America, N.A., 57 Cal. 4th 390, 395 (Cal. 2013) (California Supreme Court decision holding that an action could be brought under the UCL based on a borrowed federal statute that did not authorize a private right cause of action because the federal statute contained a savings clause). 447 Dkt. Opn., at p.6. Seizing on the language in 15 U.S.C. § 6103(f)(1) allowing only for actions “in State court,” however, Judge Meyerscough ruled that the statue’s savings clause “does not limit the effect of § 6103(d) to bar California from bringing an action in this Court at this time.” Id, at p.7. “California may not bring an action in this Court for the violations of the [Telephone Sales Rule] alleged in Counts I and II,” the court held, “because the United States is currently pursuing those claims on behalf of the FTC.” Id.
The practical guidance of Judge Meyerscough’s ruling is unclear. Although the court referenced the California Supreme Court’s decision in Rose v. Bank of America, in her opinion, Judge Meyerscough did not discuss a key theoretical underpinning of the Rose decision: that the UCL “borrows from other laws and treats them as unlawful practices that are independently actionable” under the California statute. Rose, 57 Cal.4th at 396 [citing Stop Youth Addiction, Inc. v. Lucky Stores, Inc., 17 Cal.4th 553, 570 (1998)] (emphasis added).
In Rose, private litigants brought a UCL claim against Bank of America, asserting unlawful practices predicated on violations of the federal Truth in Savings Act (TISA). The bank demurred, arguing that Congress had expressly prohibited private rights of action under TISA. The trial court sustained the demurrer, and the Court of Appeal affirmed. The California Supreme Court reversed, observing: that “[c]ontrary to the Bank’s insistence that plaintiffs are suing to enforce TISA, a UCL action does not ‘enforce’ the law on which a claim of unlawful business practice is based.” Rose, 57 Cal. 4th at 396 (emphasis added). “Thus, we have made clear that by borrowing requirements from other statutes, the UCL does not serve as a mere enforcement mechanism. It provides its own distinct and limited equitable remedies for unlawful business practices, using other laws only to define what is ‘unlawful’” under the UCL. Id at 397.
Elizabeth C. Pritzker
Pritzker Levine LLP
From the February 2015 E-Brief
Ninth Circuit Amends AUO Decision in TFT-LCD Cartel Case, Finds “Domestic Effects” Test Satisfied
On January 30, 2015, the United States Court of Appeals for the Ninth Circuit issued an Amended Order in United States of America v. Hui Hsuing, case no. 12-10492. The January 30, 2015 order (1) amended the Ninth Circuit’s opinion in United States of America v. Hui Hsuing, 758 F.3d 1074 (9th Cir. 2014), filed on July 10, 2014; (2) denied a petition for panel rehearing; and (3) denied a petition for rehearing en banc. The Hui Hsuing case is commonly referred to as “AUO”, in reference to one of the primary corporate defendants.
In the Amended Order, the Ninth Circuit explicitly ruled on the “domestic effects” test of the Foreign Trade Antitrust Improvements Act (“FTAIA”), 15 U.S.C. § 6a and ruled that the domestic effects requirement of the FTAIA had been satisfied.
The case arose from the long-running cartel to fix the prices of TFT-LCD panels. The appellants were convicted of violating the Sherman Act. The cartel involved a conspiracy by Korean and Taiwanese companies which included five years of secret meetings in Taiwan, sales of TFT-LCD panels worldwide including in the United States, and millions of dollars of profits for the cartelists. The appellants were Taiwanese company AU Optronics (AUO), AUOA, AUO’s retailer and wholly owned subsidiary, and two executives from AUO. While Appellants asserted multiple grounds to challenge their convictions – all of which were rejected – this article focuses on their challenges based on the FTAIA, specifically their argument that because “the bulk of the panels were sold to third parties worldwide rather than for direct import into the United States, the nexus to United States commerce was insufficient under the Sherman Act as amended by the” FTAIA.
In its July 10, 2014 opinion, the Ninth Circuit determined that it did not need to “resolve whether the evidence of the defendants’ conduct was sufficiently ‘direct’ or whether it ‘gives rise to an antitrust claim,’ because, as we noted earlier, ‘any rational trier of fact could have found the essential elements of the crime beyond a reasonable doubt,’ with respect to import trade.” 758 F.3d at 1094 (citations omitted, emphasis in original).
In the Amended Order, the Ninth Circuit explicitly addressed this domestic effects test, holding “[l]ooking at the conspiracy as a whole, and recognizing the standard on appeal is whether ‘any rational trier of fact could have found the essential elements of the crime beyond a reasonable doubt,’ [ ] we conclude that the conduct was sufficiently ‘direct, substantial, and reasonably foreseeable with respect to the effect on United States commerce.” Opinion at 41. In “looking at the conspiracy as a whole", the Ninth Circuit noted that:
- TFT-LCDs are a substantial cost component of finished products.
- The cartel’s secret meetings and agreements in furtherance of the conspiracy “led to direct negotiations with United States companies, both domestically and overseas, on pricing decisions.” Opinion at 42.
- Some panels were sold overseas to foreign subsidiaries of American companies or to systems integrators and incorporated into finished products, and it was “understood” that substantial numbers of these finished products were destined for the United States and thus “the practical upshot of the conspiracy would be and was increased prices to customers in the United States.” Opinion at 42.
The Ninth Circuit elaborated on point three with examples of (1) panel purchaser Dell having a factory in Malaysia where 100% of the products were destined for American markets, (2) foreign systems integrators purchasing panels for integration into finished products with direct oversight of TFT-LCD pricing by United States manufacturers, (3) the global product arm of a United States company purchasing price-fixed panels from a defendant and selling them to systems integrators, and (4) system integrators purchasing panels from defendants based on custom orders from United States companies. Based on these factors, the court found an “integrated, close and direct connection between the purchase of the price-fixed panels, the United States as the destination for the products, and the ultimate inflation of prices in finished products imported to the United States.” Opinion at 43. The court concluded that this direct connection was “neither speculative nor insulated by multiple disconnected layers of transactions.” Id. The court further distinguished the facts before it from the claimed domestic effect which was deemed insufficient in United States v. LSL Biotechnologies, 379 F.3d 672 (9th Cir. 2004), describing that claim as “resting on speculation as to future innovation in tomato seeds and lack[ing] an existing effect on American tomato customers.” Opinion at 43.
The court directly addressed the recent Seventh Circuit decision in Motorola Mobility LLC v. AU Optronics Corp., 2014 U.S. App. LEXIS 22408 (7th Cir. November 26, 2014), which arose from the same cartel and applied the FTAIA in granting summary judgment to the defendants. That opinion was discussed in the Antitrust Section’s January 2015 e-brief. The court indicated that its ruling was consistent with Motorola because the “private” claim in Motorola ultimately failed due to the bar against indirect purchaser claims of Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977). The Ninth Circuit also noted that the Seventh Circuit in Motorola had indicated that the United States could pursue criminal charges and injunctive relief provided that the requisite statutory effects were present.
The Ninth Circuit also noted in a footnote that both the Second Circuit and the Seventh Circuit disagree with the Ninth Circuit’s more stringent definition of “direct effects” for purposes of the FTAIA. The Ninth Circuit has held that an effect is “direct” if it “follows as an immediate consequence of the defendant’s activity”, United States v. LSL Biotechnologies, 379 F.3d 672, 692 (9th Cir. 2004). The Second Circuit has held that the direct effects test requires only a “reasonably proximate causal nexus”, Lotes Co., Ltd. v. Hon Hai Precision Industry Co., Ltd, 753 F.3d 395, 398 (2d Cir. 2014) while the Seventh Circuit has held that “[s]uperimposing the idea of ‘immediate consequence’ on top of the full phrase results in a stricter test than the complete statute can bear.” Minn-Chem, Inc. v. Agrium, Inc., 683 F.3d 845, 857 (7th Cir. 2012). In the Amended Order, the Ninth Circuit stated that whether it should reconsider “the stricter standard we impose is not within the province of this panel because a three judge panel may not overrule a prior decision of the court” while noting that “in any event, the result is the same and the defendants benefit from our circuit’s formulation.” Opinion at 41 n. 9.
Cotchett, Pitre & McCarthy, LLP
Supreme Court Permits Immediate Appeal from District Court Dismissal in LIBOR Antitrust MDL
In Ellen Gelboim, et al. v. Bank of America Corporation et al. 574 U.S. __, 2015 U.S. LEXIS 756 (January 21, 2015), Petitioners Gelboim and Zacher brought an action against defendant banks for violating federal antitrust law by acting in concert to depress the London InterBank Offered Rate (LIBOR). Petitioners’ case was centralized for pretrial proceedings in the Southern District of New York together with some 60 other cases pursuant to 28 U.S.C. § 1407. The District Court granted the banks’ motion to dismiss on the basis that the plaintiffs had not properly pled antitrust injury. Acting on its own motion, the Court of Appeals for the Second Circuit dismissed the appeal filed by petitioners for want of appellate jurisdiction. The Supreme Court reversed, holding that immediate appellate review could be sought because the Gelboim-Zacher action retained its independent status for purposes of appellate jurisdiction under 28 U.S.C. § 1291.
Petitioners argued that the order dismissing their case in its entirety removed them from the MDL, thereby triggering their right to appeal under § 1291. The Supreme Court agreed, holding that petitioners’ right to appeal ripened when the District Court dismissed their case, not upon the eventual completion of multi-district proceedings in all of the cases. Cases consolidated for MDL pretrial proceedings ordinarily retain their separate identities, so an order disposing of one of the discrete cases in its entirety qualifies under § 1291 as an appealable final decision. Furthermore, the Supreme Court held, the District Court’s order dismissing the Gelboim-Zacher complaint for lack of antitrust injury had the hallmarks of a final decision. The District Court ruled on the merits of the case, completed its adjudication of petitioners’ complaint, and terminated their action. The § 1407 centralization offered convenience for the parties and promoted efficient judicial administration, but did not meld the Gelboim-Zacher action and others in the MDL into a single unit.
The Court rejected defendants’ argument that after centralization under § 1407 consolidation no right to appeal accrues until the entire MDL ends. Defendant banks also argued that the position adopted by the Court would permit parties with the weakest cases to appeal sooner than other parties, while parties with stronger cases would be unable to appeal simultaneously because they have other claims still pending. Defendants argued that Federal Rule of Civil Procedure 54(b) could be used to grant early appeals, but Rule 54(b) was of no avail to Gelboim and Zacher because it “does not apply to a single claim action nor to a multiple claims action in which all of the claims have been finally decided.”
Cotchett, Pitre & McCarthy, LLP
The Ninth Circuit Rules That “San Jose has struck out” on its bid to Overturn Baseball’s Antitrust Exemption
Baseball is the only national sport that is exempt from the antitrust laws. The baseball exemption has existed for 92 years and withstood both court and Congressional challenges, despite the United States Supreme Court’s acknowledgement that the exemption may be described as “unrealistic, inconsistent, or illogical” (see Radovich v. Nat’l Football League, 352 U.S. 445, 451-52 (1957)). The exemption was created in 1922, when the Supreme Court first held that Major League Baseball (“MLB”) was not subject to the federal antitrust laws because it was not involved in interstate commerce. Over the years, the federal courts have adopted the view that baseball is exempt from the antitrust laws, even though it is undisputedly engaged in interstate commerce. Since 1953, the Supreme Court has addressed baseball’s antitrust exemption from federal antitrust laws several times and each time explicitly refused to overturn it, stating repeatedly that baseball’s exemption could only be altered through legislation. Then, in 1998, Congress passed the Curt Flood Act, which revoked baseball’s antitrust exemption with respect to employment issues but did not disturb it for other matters.
Given this history, it is not surprising that on January 15, 2015, the Ninth Circuit rejected San Jose’s appellate arguments for overturning baseball’s antitrust exemption. See City of San Jose v. Office of the Comm’r of Baseball, _ F3d. _, No. 14-15139, 2015 WL 178358 (9th Cir. Jan. 15, 2015) (“San Jose v. MLB”). The appeal arose as a result of the Oakland Athletics’ effort to relocate their baseball franchise to San Jose. When the A’s asked MLB for permission to move to San Jose, the league shelved the request in a committee. San Jose then sued MLB, claiming that the refusal was an agreement among MLB team owners to preserve the San Francisco Giants’ local monopoly in violation of the federal and state antitrust laws. Judge Ronald Whyte of the Northern District of California dismissed San Jose’s action on grounds that “MLB’s alleged interference with the A’s relocation to San Jose is exempt from antitrust regulation.” City of San Jose v. Office of the Comm’r of Baseball, 2013 WL 5609346, at *11 (N.D. Cal., Oct. 11, 2013). San Jose appealed to the Ninth Circuit.
Judge Kozinski, writing for the Ninth Circuit, affirmed the dismissal of San Jose’s antitrust claims stating “San Jose has struck out” on its effort to overturn baseball’s antitrust exemption. San Jose v. MLB, 2015 WL 178358, at *5. After reviewing the Supreme Court case law assigning responsibility to Congress to make any necessary changes to the exemption, the Ninth Circuit concluded that congressional acquiescence to the baseball antitrust exemption was evident through the 1998 Curt Flood Act. The Court explained:
[W]hen Congress specifically legislates in a field and explicitly exempts an issue from that legislation, our ability to infer congressional intent to leave that issue undisturbed is at its apex.
The exclusion of franchise relocation from the Curt Flood Act demonstrates that Congress (1) was aware of the possibility that the baseball exemption could apply to franchise relocation; (2) declined to alter the status quo with respect to relocation; and (3) had sufficient will to overturn the exemption in other areas.
Id. at *4. The Ninth Circuit also affirmed the dismissal of San Jose’s state antitrust claims because “[b]aseball is an exception to the normal rule that ‘federal antitrust laws supplement, not displace, state antitrust remedies.” Id. Baseball’s special status under the antitrust laws was thus, once again, affirmed in full.
San Jose has indicated that it will appeal the Ninth Circuit’s ruling to the Supreme Court. Counsel for the City of San Jose, Joseph Cotchett, said: “We argued to the Ninth Circuit Court of Appeals that, no matter which way they held, this case was going to the Supreme Court. We believe the Supreme Court will treat baseball like any other business in America and find MLB’s supposed exemption does not apply to the A’s proposed move. The A’s should be allowed to relocate to San Jose.”
The issue is what can the Supreme Court do? Some argue that if Congress addressed the franchise relocation issue in the Curt Flood Act, the Supreme Court can only find the Curt Flood Act unconstitutional, it cannot rewrite a statute with which it does not agree. Others argue that the Curt Flood Act addressed only the reserve clause not the franchise relocation issue and furthermore, having created the exemption, the Court has the power to abrogate the exemption.
John L. Cooper and Racheal Turner
Farella Braun + Martel LLP
Supreme Court Hears Arguments on Preemption of State Antitrust Law
On January 12, the United States Supreme Court heard arguments in Oneok, Inc., v. Learjet, Inc., No. 13-271, a case presenting important questions regarding federal preemption of state antitrust laws.
Oneok v. Learjet stems from manipulation of the natural gas market during the 2000-02 energy crisis that resulted in dramatic increases in the prices of electricity and natural gas, particularly in California. Learjet and other plaintiffs filed state court class action complaints on behalf of retail purchasers of natural gas, alleging that the defendants, natural gas sellers and marketers, violated state antitrust laws that resulted in higher retail gas prices. The conduct included engaging in “wash trades” — offsetting sales among the defendants designed to inflate prices — and reporting false prices to publishers of gas price “indexes,” on which a substantial number of gas sale contracts refer to establish pricing. Plaintiffs alleged that as a result retail natural gas purchasers paid artificially higher prices.
The cases were removed to federal court under the Class Action Fairness Act and consolidated in a multi-district proceeding in the District Court of Nevada. The defendant gas companies marketed natural gas pursuant to “blanket certificates” issued by the Federal Energy Regulatory Commission (“FERC”) pursuant to the federal Natural Gas Act (“NGA”). In 2011, the District Court entered summary judgment against the plaintiffs, reasoning that plaintiffs’ state law antitrust claims are preempted by the NGA, which confers exclusive jurisdiction in FERC to regulate interstate wholesale sales of natural gas as well as practices “affecting” gas rates within FERC’s jurisdiction. Because the conduct, wash sales and false reports to index publishers, had been expressly addressed by FERC orders and affected wholesale prices — even though the conduct may also have affected retail prices that were outside of FERC’s jurisdiction — the District Court held that the state law claims were preempted, concluding the federal regulatory scheme “occupied the field” in which the plaintiffs sought to apply state antitrust laws.
On appeal, the Ninth Circuit Court of Appeals reversed. The Ninth Circuit concluded that the state law claims were not preempted because the specific transactions that were at issue in the lawsuits — retail purchases by the plaintiffs — did not fall within FERC’s jurisdiction. The Ninth Circuit recognized that FERC has exclusive jurisdiction over practices that affect wholesale rates within its jurisdiction. But it held that the NGA’s grant of exclusive jurisdiction to FERC does not preempt state antitrust claims that “aris[e] out of price manipulation associated with [retail] transactions falling outside of FERC’s jurisdiction.” The Supreme Court granted certiorari to resolve the question of the scope of federal preemption over state antitrust claims.
The main question before the Supreme Court is where the analysis should focus for purposes of determining federal field preemption of state antitrust laws. Should a court focus on the conduct that has been alleged and whether that conduct falls within the jurisdiction of the federal agency? If so, then because it was not disputed that FERC could, and did, regulate the defendants’ conduct, the state law claims here would be preempted. Or should a court focus on the transaction in which the plaintiffs claimed to have experienced artificially higher prices, regardless of whether the conduct that ultimately caused those prices was within the federal agency’s authority? In that case, the state antitrust claims would not be preempted because the retail transactions in which the plaintiffs purchased natural gas are not within FERC’s jurisdiction to regulate wholesale gas prices.
At the January 12, 2015 oral argument, a number of justices appeared to struggle with these questions. The justices asked both sides a number of detailed hypotheticals to try to flesh out where the preemption lines should be drawn. For example, Justice Kagan asked counsel for the gas companies:
[W]hy should the field preemption carry into a sphere where the practice being regulated is commonly affected, both wholesales sales, which are clearly in the bailiwick of the federal government, and retail sales which are just as clearly in the bailiwick of the state?
By contrast, Justice Scalia focused on the conduct of the defendants rather than the purchases of the plaintiffs, commenting:
The gravamen of your complaint is the fiddling with the reporting. . . . That is the antitrust violation, that conspiracy to report false amounts and to make false sales. There is no doubt that the Natural Gas Act places that within the control of the commission. They it does have the power to regulate those transactions and to punish violations of those transactions.
Notably, the United States appeared as an amicus supporting the defendant natural gas companies’ position. A number of individual states appeared in support of the plaintiffs.
The decision in Oneok v. Learjet could have broad implications on the reach of state antitrust laws in areas of commerce that are subject to some federal regulation but which are not solely or entirely covered by federal regulatory statutes. These include not only energy sales but also a variety of transactions in the fields of securities, banking, insurance, transportation, pharmaceuticals, and numerous others. The Supreme Court should issue its decision by June.
Geoffrey T. Holtz
Morgan Lewis & Bockius LLP
New Faces on the Bench: Profile of District Judge Haywood Gilliam
The United States District Court for the Northern District of California has a new face on the bench. On the recommendation of Senator Dianne Feinstein, President Obama nominated Haywood S. Gilliam, Jr. in August 2014 to fill a vacancy created by Chief U.S. District Judge Claudia Wilken of the Oakland Division, who has transferred to senior status. The Senate confirmed Judge Gilliam in December 2014.
Judge Gilliam graduated magna cum laude from Yale in 1991, and earned his law degree in 1994 from Stanford Law School, where he was an Article Editor for the Stanford Law Review. After graduating, Judge Gilliam clerked for U.S. District Judge Thelton Henderson in the Northern District of California from 1994 to 1995. He then entered private practice, working as an associate at the law firm of McCutchen, Doyle, Brown & Enersen from 1996 to 1999. As a young associate, his practice was focused on civil litigation in securities, telecommunications, antitrust, construction and breach of contract matters.
In 1999, Judge Gilliam left private practice, serving as an Assistant United States Attorney for the Northern District of California until 2006. During that time he investigated and prosecuted cases including securities fraud, mail and wire fraud, violent crimes and immigration crimes. He served as the Chief of the Securities Fraud Section from 2005 to 2006, supervising a team of attorneys in prosecuting securities and corporate fraud matters. During this time, he also served on the Department of Justice’s nationwide Securities and Commodities Fraud Working Group.
Judge Gilliam returned to private practice in 2006 as a partner at Bingham McCutchen LLP, where his practice consisted of counseling clients in criminal and regulatory enforcement matters and internal investigations, including securities, antitrust, healthcare, anti-corruption, export controls, trade secret, environmental and other white collar matters. Three years later, he became a partner at Covington & Burling, where he served as the Vice-Chair of the firm’s White Collar Defense and Investigations practice group.
He has been widely recognized for his accomplishments in private practice. He was included as a Best Lawyers in America for Criminal Defense: White Collar in 2013 and 2014, a Benchmark Litigation Future Star in 2013 and 2014, and was recognized by Northern California Super Lawyers from 2008 to 2013.
While in private practice, Judge Gilliam had significant defense-side antitrust experience. Judge Gilliam’s white collar practice at Covington included representing clients before the Antitrust Division in bid rigging and price fixing investigations. While at Bingham McCutchen he represented the NCAA in a federal class action antitrust claim brought by former college football and basketball players. White et al. v. National Collegiate Athletic Association, Case 2:06-cv-00999-VBF-MAN (C.D. Cal. 2008). In that case, the players alleged the rules governing financial aid awarded to student athletes was an unlawful restraint on competition, violating the Sherman Act § 1. The case ultimately settled before trial. Additionally Judge Gilliam coauthored a paper concerning the intersection of white collar and antitrust investigations. See Strategic Considerations in Cases Involving Joint Criminal Investigations by the Antitrust Division of the US. Department of Justice and Other U.S. Law Enforcement Agencies, Bloomberg Antitrust & Trade Law Report (June 28, 2010). Judge Gilliam also participated in the Mock Trial held at the 2012 ABA Section of Antitrust Law Spring Meeting in Washington D.C.
Lee F. Berger & Mary H. Walser
Paul Hastings LLP
From the January 2015 E-Brief
California Parens Patriae Claims Barred After Class Action Settlement
In The People of the State of California v. IntelliGender, LLC, 771 F.3d 1169 (9th Cir. Nov. 7, 2014), the Ninth Circuit issued an opinion addressing the State’s authority to seek relief to protect its citizens against improper business practices in light of a settlement in a parallel consumer class action. California v. IntelliGender, LLC, No. 13-56806, 2014 WL 5786718 (9th Cir. Nov. 7, 2014). The panel agreed with the district court that the class action settlement did not interfere with the State’s right to seek civil penalties or an injunction against the defendant, but found that the State could not bring restitution claims for injuries to parens patriae class members that had already resolved their claims against IntelliGender through the parallel class action, based on res judicata principles.
IntelliGender LLC manufactures and sells the IntelliGender Prediction Test (“Test”), a urine test used to predict a fetus’ gender. In a federal class action, Gram v. IntelliGender, plaintiffs alleged that IntelliGender engaged in false advertising and unfair competition regarding the Tests.
On April 23, 2012, the district court granted final approval of a class settlement agreement in Gram, covering a class of all purchasers of the Tests in the United States between November 1, 2006 and January 31, 2011. IntelliGender agreed to pay $10 per approved claim, provide a product donation worth $40,000, and amend its advertising and product materials to clarify certain misleading statements. IntelliGender provided the notice of the settlement to state and federal officials as required by the Class Action Fairness Act (“CAFA”) and received no comments or objections.
On November 9, 2012, the State of California filed an action against IntelliGender, alleging the same theories of unfair competition and false advertising as used in Gram, in violation of California’s Unfair Competition Law (“UCL”). The State sought injunctive relief, civil penalties, and restitution for a parens patriae class of California residents purchasing the Tests. IntelliGender asked the Gram court to enjoin the State’s enforcement action in the California case. On September 20, 2013, the Gram court denied that request.
IntelliGender then moved for an injunction solely with regard to the State’s claims for restitution, arguing that any relief would be double recovery for class members, barred by the res judicata doctrine. On October 16, 2013, the district court denied IntelliGender’s motion. IntelliGender appealed the denial of both motions to enjoin.
On appeal, the Ninth Circuit affirmed the denial of the motion to enjoin the entirety of the State’s enforcement action, but reversed the denial of the motion to enjoin the State’s restitution claims. The court noted that while the Anti-Injunction Act, 28 U.S.C. § 2283, generally bars federal courts from enjoining state court actions, the relitigation exception allows federal courts to issue an injunction to protect or carry out a federal court’s judgments under the res judicata doctrine. In the Ninth Circuit, res judicata applies to judgments that are (i) final on the merits; (ii) involve the same causes of action or claims; and (iii) involve identical parties or privities.
Regarding the motion to enjoin the State’s enforcement action as a whole, the court observed that only two of the three elements for res judicata were satisfied. First, a final judgment was entered in the Gram class action. Second, the Gram class action involved the same causes of action and claims being pursed through the State’s enforcement action. But the court rejected IntelliGender’s contention that the required element of privity existed between the State and members of the Gram class. The court emphasized that when the State acts in its sovereign capacity to defend public and private concerns, the State is not necessarily bound by the disposition of a related class action. As a result, when the State acts on behalf of its citizens, the scope of remedial measures available should be broad. Here, for example, under the UCL, the State is empowered to seek civil penalties and injunctive relief.
The court also rejected IntelliGender’s contention that the State’s failure to object during the mandatory CAFA notice period should weigh in favor of granting the motion to enjoin the State’s entire enforcement action. The court reiterated that the CAFA notice provisions do not impose any additional obligations on the government and failure to object does not on its own bar the State from pursuing related enforcement actions.
Regarding the motion to enjoin the State’s restitution claims only, the court similarly found that the res judicata elements of (i) final judgment and (ii) same claims were met between the Gram class action and the State’s restitution claim. But here the court found that where the State seeks the same relief previously granted to class members, sufficient privity exists between the parties to justify the application of res judicata. The court reasoned that the restitution claim could be properly enjoined under the district court’s continuing jurisdiction over the Gram settlement agreement.
The court noted that the district court decision rested on two erroneous assumptions: first, that there was a substantial difference between the Gram certified class members and the citizens on whose behalf the State was seeking restitution; and second, that the restitution amounts differed between the Gram and State’s claims. The court explained that the first assumption was factually incorrect, since the class was broadly comprised of all individuals who purchased and used a Test, not just those who received an inaccurate result. While compensation was limited to those who received inaccurate results, the settlement still bound all purchasers. Had the State wanted to object to a fundamental unfairness in the settlement agreement, they had the opportunity during the ninety-day CAFA notice period.
The second assumption was similarly erroneous, as any difference in the amount of restitution sought is irrelevant to a privity analysis. The court explained that “the appropriate inquiry is not what relief was ultimately granted, but whether the government is suing for the same relief already pursued by the plaintiff.” Both the Gram class and the State sought restitution in this matter, which amounts to an attempt at double-recovery, in violation of the deeply rooted principles of res judicata.
Finally, the court emphasized that its decision does not deprive the State of its ability to protect its citizens. The safeguards built in to CAFA, including the mandatory notice provisions, give the State adequate opportunity to object to inequitable outcomes. The State’s decision to not object during the certification and settlement process precludes them from pursuing the same relief that the Gram class already obtained.
As an initial matter, the court has affirmed the State’s independence in pursuing its own claims for injunctive relief and civil penalties, the hallmarks of state enforcement, under the state competition laws. The court recognized the important role that the State plays in protecting its citizens from unfair practices and the State’s broad ability to seek relief on their behalf.
But in standing against double recovery for consumers, the IntelliGender decision has important implications for CAFA class actions and parallel parens patriae proceedings. The court’s decision limits the State’s ability to seek restitution once members of the certified class release their damages claims or are awarded damages. Not only would allowing consumers to receive multiple recoveries through both a private class action and an attorney general’s parens patriae action violate res judicata principles, it also would run afoul of other tenets of the legal system, including the ability of parties to rely on the finality of judgments and on the good faith settlements and releases. As a matter of policy, allowing the State’s action to proceed would open the door to collateral attacks on final judgments and releases, as well as duplicative recovery, which disincentivizes parties to reach settlements in disputes.
The decision also will likely help effectuate CAFA’s notice provisions by encouraging attorneys general to pay closer attention to the CAFA notices they receive and intervene in class settlements where necessary to ensure that the rights of their citizens are being protected. That increased involvement may slow down or perhaps even disrupt settlement approvals, especially if state attorneys general believe that an attorney’s fee award is too high or that the attorneys general could get a better deal for their residents.
Lee F. Berger and Matthew T. Crossman
Paul Hastings LLP
Seventh Circuit Bars Motorola’s Antitrust Claims Based on FTAIA
In Motorola Mobility LLC v. AU Optronics Corp., 2014 U.S. App. LEXIS 22408 (7th Cir. November 26, 2014), the Seventh Circuit held that the Foreign Trade Antitrust Improvements Act (“FTAIA”), 15 U.S.C. §6a, barred almost all claims made by Motorola arising from a conspiracy to fix the prices of liquid-crystal display (“LCD”) panels because the conspiratorial conduct, and Motorola’s purchases, largely took place outside the United States. In an opinion authored by Judge Richard Posner, the court held that purchases of price fixed components by Motorola’s foreign subsidiaries that were incorporated into products sold and shipped to Motorola in the United States did not give rise to claims under the Sherman Act. The court further held that its decision would not restrict the United States’ ability to pursue criminal charges against foreign defendants whose price-fixed components are sold in the United States.
Motorola was a purchaser of LCD panels. Ninety nine percent of the panels at issue were purchased by Motorola’s foreign subsidiaries, primarily in China and Singapore. Motorola’s foreign subsidiaries incorporated 42 percent of these panels into cellphones and sold them to Motorola for resale in the United States. The foreign subsidiaries incorporated the other 57 percent of these panels into cellphones that they sold outside the United States.
The court recited the requirements of the FTAIA which permit conduct in foreign commerce to give rise to a claim under the Sherman Act, known as the direct effects test. “First, there must be a direct, substantial and reasonably foreseeable effect on U.S. domestic commerce – the domestic American economy, in other words – and the effect must give rise to a federal antitrust claim. The first requirement, if proved, establishes that there is an antitrust violation; the second determines who may bring a suit based on it.” (emphasis in original).
The court held that the FTAIA’s “import” commerce exclusion did not apply because it was “Motorola, rather than the defendants, that imported these panels into the United States.” The court further held that the 57 percent of panels incorporated into phones sold outside the United States could not give rise to a claim under the Sherman Act, because they never touched U.S. commerce and therefore had no effect on U.S. domestic commerce.
As to the 42 percent of panels that did enter the United States, the court held that the FTAIA barred Motorola’s claims under the effects test.
Avoiding the issues arising from the question of whether the effect of the defendants’ foreign conduct on their sales abroad are “direct” under the first prong of the direct effects test, the court assumed arguendo that the first prong of the direct effects test was satisfied, and instead concentrated on the second prong, which requires the effect on domestic commerce to give rise to the antitrust claim. The court found that the effect of the anticompetitive conduct on domestic United States commerce did not give rise to an antitrust cause of action because the “cartel-engendered price increase in the components and in the price of cellphones that incorporated them occurred entirely in foreign commerce.” The court concluded that the immediate victims of the price-fixing were Motorola’s foreign subsidiaries, not Motorola U.S., the entity bringing the U.S. claim and claiming that it had incurred the injury in U.S. commerce.
The decision appeared to turn in part on the court’s reaction to Motorola’s arguments that it and its subsidiaries are “one” for the purpose of its antitrust claims, although “for tax purposes its subsidiaries are distinct entities paying foreign rather than U.S. taxes.” As the court said:
Distinct in uno, distinct in omnibus. Having submitted to foreign law, the subsidiaries must seek relief for restraints of trade under the law either of the countries in which they are incorporated or do business or the countries in which their victimizers are incorporated or do business. The parent has no right to seek relief on their behalf in the United States.
The court further noted that Motorola’s efforts to avoid the consequences of the separateness of its foreign subsidiaries conflicted with the Supreme Court’s decision in Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977) in that Motorola was an indirect, and not a direct purchaser. Finally the Seventh Circuit emphasized that comity considerations mandated a narrow interpretation of the geographic scope of the United States antitrust laws.
Importantly, the court contended that its decision avoided any impact on the Department of Justice’s pursuit of foreign cartels. By leaving undecided the issue of whether the effect of a cartelist’s sale of a price-fixed product abroad means that the “direct” effect of the cartelist’s foreign conduct occurred only in foreign commerce, the court sidesteps the DOJ’s concerns, leaving that question open for future courts to address (as the Second and Ninth Circuit already have). Instead, the Motorola decision’s most likely impact will be to limit the ability of U.S. plaintiffs who have chosen to move their purchasing operations abroad to bring claims based on their foreign affiliates’ purchases of price-fixed products abroad.
Cotchett, Pitre & McCarthy, LLP
Statute of Limitations Discovery Rule Applies to Sherman Act and State Law Antitrust Claims
In Fenerjian v. Nongshim Company, Ltd., 13-cv-04115-WHO, 2014 U.S. Dist. LEXIS 156229 (N.D. Cal. Nov. 4, 2014), the Hon. William H. Orrick denied in part and granted in part defendants’ motion to dismiss the consolidated antitrust complaints filed by direct purchasers alleging claims under the Sherman Act and indirect purchasers alleging claims under various state competition and consumer protection laws. Judge Orrick’s decision is notable for its explicit recognition that the discovery rule, which tolls running of the statute of limitations until a plaintiff knows or has reason to know of the injury which is the basis of the action, “applies broadly to federal litigation, including Sherman Act claims.”
The plaintiffs alleged that as early as the end of 2000 or the beginning of 2001, defendants met at the Renaissance Seoul Hotel and agreed to raise the prices of ramen noodles. Plaintiffs alleged that Nongshim, the market leader, would raise prices first and that all other defendants would then follow those price increases. These price increases took place on six separate occasions between May 2001 and April 2008. In 2012, the Korean Fair Trade Commission (“KFTC”) found that four Korean noodle makers had conspired to raise the prices of noodles.
In their motion to dismiss, defendants argued that the statute of limitations barred plaintiffs’ claims because of public information, including the meeting at the end of 2000/beginning of 2001, public announcements of price increases, defendants’ filing of business reports which included information about price increases, plaintiffs’ general knowledge of price increases in the noodle market in 2003, and the publication of newspaper articles in Korea covering a KFTC investigation.
The court held that the discovery rule governed the commencement of the plaintiffs’ claims under the Sherman Act and state law, and that none of the things defendants cited was sufficient to demonstrate that plaintiffs knew or should have known of the alleged conspiracy before the KFTC’s July 2012 announcement. As to the meeting at the end of 2000/beginning of 2001, the court noted that there was no reason to conclude that the plaintiffs or the public had access to the conspiratorial discussions. Further, knowledge of price increases alone, whether from public announcements or corporate filings, does not put a potential plaintiff on notice of antitrust violations and defendants failed to identify anything suggesting that those price increases should have put plaintiffs on notice of a conspiracy to raise prices. Finally, coverage in the Korean press of the KFTC investigation was not sufficient to cause plaintiffs to inquire into the existence of a conspiracy to raise prices in the United States.
This decision is notable because of the court’s application of the discovery rule. Although the Ninth Circuit had ruled that “in general, the discovery rule applies to statues of limitations in federal litigation”, Mangum v. Action Collection Serv., Inc., 575 F.3d 935, 940-41 (9th Cir. 2009), application of the statute of limitations in antitrust cases has frequently turned on the fraudulent concealment doctrine rather than the discovery rule. Fraudulent concealment is a different test and standard, which generally requires a plaintiff to point to affirmative acts by a defendant to conceal their wrongful conduct, actual ignorance on the part of the plaintiff, and reasonable diligence by the plaintiff to discover the misconduct in response to any information that it did have. Conmar Corp. v. Mitsui & Co. (U.S.A.), 858 F.2d 499, 503-04 (9th Cir. 1988). Because an antitrust conspiracy is typically carried out in secret, and may be facilitated by directions to destroy evidence after reading, it is unusual that facts will come to the knowledge of a potential plaintiff while a conspiracy is ongoing. Application of the discovery rule in this context is consistent with the real world context of antitrust conspiracies, and furthers the goal of private enforcement of the antitrust laws without the imposition of illogical barriers to recovery.
Cotchett, Pitre & McCarthy, LLP
From the December 2014 E-Brief
New & Noteworthy: FTC v. AT&T, Case No. 14-cv-04785-enc (N.D. Cal., Judge Chen)
On October 28, 2014, the Federal Trade Commission (“FTC”) filed a complaint against AT&T Mobility alleging that AT&T has misled millions of its smartphone customers by charging them for “unlimited” data plans while reducing or throttling their data speeds, in some cases by nearly 90 percent. The complaint charges that AT&T violated the FTC Act by changing the terms of customers’ unlimited data plans while those customers were still under contract, and by failing to adequately disclose the nature of the throttling program to consumers who renewed their unlimited data plans.
Optical Disk Drive Judge Denies Class Certification
In re Optical Disk Drive Antitrust Litigation, Case No. 10-md-2143 (N.D. Cal. Oct. 3, 2014), 2014 U.S. Dist. LEXIS 142678. On October 3, 2014, The Hon. Richard Seeborg issued an order denying class certification in a case involving alleged price fixing by the manufacturers of optical disks drives (“ODDs”) (which include CDs, DVDs and Blu-Ray ODDs). Judge Seeborg held that the two groups of plaintiffs (direct purchaser plaintiffs (“DPPs”) and indirect purchaser plaintiffs (“IPPs”)) did not demonstrate that common issues of fact and law predominated with respect to class-wide antitrust injury and damages.
The DPPs had tried to demonstrate antitrust injury and damages through their expert who opined that the ODD industry was “conducive” to anticompetitive activity. But Judge Seeborg found that the DPPs’ expert only demonstrated that the purchasers on the whole may have been overcharged. The expert made no attempt to establish, but instead merely assumed, class wide-impact stemming from the alleged anticompetitive conduct. As to damages, Judge Seeborg held that DPPs’ method of calculating damages (calculating a flat percentage of the overall price of the sold product) was flawed as a purchaser of, for example, an expensive computer would be found to have suffered more than a purchaser of a bargain computer, even though the same ODD was installed.
Judge Seeborg further held that, even if the DPPs had established predominance, the class as defined by the DPPs would not meet the standard of typicality or superiority. The named plaintiffs were three small companies and four individuals who purchased non-customized ODDs from one of the defendants at non-negotiable list prices. The DPP’ class included ODD purchasers who had the ability to negotiate prices. The disparity in purchasing power between these purchasers would preclude class certification of a class as defined by DPP.
As for the IPPs, while Judge Seeborg held that held that while they had established commonality, typicality and adequacy, the IPPs, like the DPPs, failed to demonstrate that antitrust injury and resulting damages could be shown on a class-wide basis. Again, the IPPs’ expert assumed class-wide impact rather than demonstrating antitrust injury through results. The IPPs’ expert analysis also demonstrated a high correlation between prices across customers and across different types of ODDs but did not account for the fact that such correlations could exist even without the alleged price fixing. Judge Seeborg noted that during the class period, prices of ODDs were declining due to independent factors.
Magistrate Strikes Portions of Expert Opinions, Recommends Class Certification in Air Cargo Price-Fixing Case
In re Air Cargo Shipping Services Antitrust Litigation, E.D.N.Y. case no. 1:06-md-1775-JG-VVP (Oct. 15, 2014) Magistrate Judge Viktor V. Pohorelsky issued a 114 page opinion recommending that the district court grant the plaintiffs’ motion for class certification. The plaintiffs had alleged that the defendant airlines participated in a global conspiracy to unlawfully inflate the prices charged to ship goods by air transportation by imposing a uniform “fuel surcharge.”
In connection with their motion for class certification, the plaintiffs moved to strike certain opinions of the defendants’ three experts. The Court granted plaintiff’s motion to strike certain of those opinions on the grounds that they were unsupported by scientific evidence, contained a “devastating miscalculation,” and were misleading.
As to the issue of class certification, the defendant airlines attempted to defeat class certification by arguing that common issues of antitrust injury and damages did not predominate. The defendants argued that each plaintiff was capable of individually negotiating different base rates for shipping, which would have allowed them to “negotiate away” or waive the impact of the fuel surcharges. But plaintiffs submitted evidence that fuel surcharge waivers and negotiation offsets did not happen very often. The court found this evidence persuasive. It held that even if it was true that each plaintiff had a chance to negotiate, the law did not require plaintiff to demonstrate that every class member suffered damages.
Titanium Dioxide Case Falters on AGC Standing Issues . . .
Los Gatos Mercantile, Inc. v E.I. DuPont de Nemours and Company et al, Case No. 13 cv-01180-BLF (N.D. Cal. Sept. 22, 2014), 2014 U.S. Dist. LEXIS 133540.Four manufacturers of titanium dioxide moved to dismiss collusive pricing claims asserted by indirect purchaser plaintiffs under the federal Sherman Act, 15 U.S.C. § 1, and various state antitrust, consumer protection and unjust enrichment statutes for lack of antitrust standing under Article III andAssoc. Gen. Contractors v. Cal. State Council of Carpenters (“AGC”), 459 U.S. 519 (1983). On September 22, 2014, District Court Judge Beth Labson Freeman granted the motion, in part, with leave to amend. The Court held that only plaintiffs that reside or purchased the product in the state have standing to assert claims under that particular state’s antitrust or consumer laws. The Court also found that the ‘antitrust standing’ principles enunciated by the Supreme Court in AGC applied to claims asserted by plaintiffs under California and New York antitrust laws, following precedent with respect to those states’ laws.
Several paint retailers filed a nationwide indirect purchaser class action in the District Court for the Northern District of California against four manufacturers of titanium dioxide, asserting claims under state and federal antitrust laws, state consumer protection statutes, and state common laws. Titanium dioxide is a chemical used in paint and in other products (such as paper, plastic, inks, pharmaceutical coatings, toothpaste, sunscreen, cosmetics, rubber, ceramic and food). Plaintiffs allege defendants and co-conspirators engaged in collusive pricing to dominate and control the titanium dioxide market in the United States by, among other things, discussing pricing when they met at trade show functions and engaging in lock-step price increases. Plaintiffs allege the coordinated price increases occurred from 2002 through 2008 despite flat demand and excess supply. They further allege that overcharges for titanium dioxide were passed through each level of distribution to plaintiffs, who purchased “paint and other products containing Titanium Dioxide manufactured by one or more of the Defendants.”
The operative complaint asserts claims for (1) damages under antitrust laws of 25 states; (2) damages under consumer protection laws of thirteen states; (3) disgorgement under unjust enrichment of thirty-two states; and (4) injunctive and equitable relief under the Sherman Act, 15 U.S.C. § 1. Defendants moved to dismiss all claims for lack of Article III standing, lack of antitrust standing, and failure to state a claim on which relief may be granted. The original named plaintiffs are residents of seven states.
The Court’s Order:
In the first part of the motion, defendants argued that plaintiffs lacked Article III standing to assert antitrust, consumer production or other claims under the laws of those states in which no plaintiff resided or purchased products. Judge Freeman analyzed whether questions regarding the ultimate scope of the class action should be addresses at class certification and not at the pleading stage. Although the Court found “no controlling case law on this issue,” Judge Freeman noted “the trend in the Northern District of California is to consider Article II issues at the pleading stage in antitrust cases and to dismiss claims asserted under the laws of states in which no plaintiff resides or has purchased products,” citing In re Ditropan XL Antitrust Litig., 529 F. Supp. 2d 1098 (N.D. Cal. 2007) and cases following Ditropan’s lead.Order at 5-6. The Court acknowledged that cases from other courts and other jurisdictions have reached contrary holdings. Id. a 6-7. The Court’s order “joins the majority of courts in the Northern District in concluding that dismissal is appropriate with respect to claims asserted under the laws of the states in which no Plaintiff resides or has purchased products,” and grants the motion to dismiss with leave to amend to add additional plaintiffs.
Judge Freeman next addressed the question of whether AGC’s requirements for ‘antitrust standing’ apply to state law antitrust claims. In AGC, the Supreme Court held that, with respect to antitrust claims brought under the Sherman Antitrust Act, the presiding court must determine “whether the plaintiff is a proper party to bring a private antitrust action.” AGC, 560 U.S. at 535, n.31. Under AGC, as applied in the context of federal antitrust claims, courts consider the question of ‘antitrust standing’ in light of several factors: (1) the nature of plaintiffs’ injuries and whether plaintiffs were participants in the relevant markets; (2) the directness of the alleged injury; (3) the speculative nature of the alleged harm; (4) the risk of duplicative recovery; and (5) the complexity in apportioning damages. In re TFT-LCD (Flat Panel) Antitrust Litig. (“LCDs”), 586 F.Supp.2d 1109, 1123 (N.D. Cal. 2008) (citing AGC, 459 U.S. at 536-39).
Plaintiffs argued that the AGC analysis did not apply to state law antitrust law claims, asserting that such application would effectively abrogate the remedies authorized by relevant states’ repealer statutes. Judge Freeman acknowledged different approaches by district courts within the Ninth Circuit addressing the issue, including two key cases: In Re Dynamic Random Access (DRAM) Antitrust Litig. (“DRAM I”), 516 F. Supp. 2d 1072, 1093-95 (N.D. Cal. 2007) (holding that AGC applies to the antitrust statutes of thirteen other states based upon state court decisions applying federal law and/or statutory harmonizing provisions indicating that federal law applies); and LCDs, 586 F. Supp. at 1123 (holding that “it is inappropriate to broadly apply the AGC test to plaintiffs’ claims under the repealer states’ laws in the absence of a clear directive from those states’ legislatures or highest courts”). Adopting in large part the approach used by the court in LCDs, Judge Freemen held: “it is appropriate to apply the AGCfactors to a repealer statute if the state legislature or a state court decision clearly indicates that federal law should be followed in construing the statute. A decision of the state’s highest court is controlling, and a lower state court is in a better position than this Court to predict its highest court’s approach. However, the Court is not persuaded that AGC should be applied to a repealer statute based solely on a general harmonization provision therein.” Order at 9.
The Court then looked to state law cases applying AGC to the state’s antitrust laws. Observing that courts in California and New York had applied AGC to those states’ antitrust statutes, Judge Freeman held it was appropriate to apply the AGC factors to claims asserted under California and New York state antitrust laws. Order at 10. Finding no state court decisions applying AGC to the antitrust statutes of Mississippi or Tennessee, the Court declined to applyAGC to the claims arising under the antitrust laws of those states. Id. at 10-11.
Applying the AGC factors to the Sherman Act § 1 claims and the claims brought under the antitrust laws of California and New York, the Court concluded that plaintiffs had failed to plead facts to establish ‘antitrust standing’ in two key respects.
First, the court held that plaintiffs failed to plead facts to show that they were participants in the relevant market (the first AGC factor), which plaintiffs defined as including “every product in the United States that contains titanium dioxide.” Order at 12. To satisfy AGC, Judge Freeman held, plaintiffs must at a minimum allege facts to show that the market for products containing titanium dioxide is “inextricably linked” to the titanium market in which the alleged collusive pricing behavior occurred. Plaintiffs must also allege facts to so show they will be able to physically trace titanium dioxide manufactured by defendants through the distribution chain to a plaintiff purchased product. Id. Facts to support such tracing also are necessary, the court held, to satisfy AGC’s requirements that the directness of alleged injury and nature of the alleged harm is neither speculative nor too remote. Id. at 13-14.
Second, with respect to the California and New York state law antitrust claims, the court held that plaintiffs had not pled facts that would enable a trier of fact to readily apportion damages and avoid duplicative recovery -- a task the court viewed as difficult given that the putative classes here include indirect purchasers at every level of the distribution chain, and purchases of all products containing titanium dioxide (even if in trace amounts). Order, at 14.
Implications for Indirect Purchaser Claims in California Antitrust Actions
Judge Freeman follows Northern District of California precedent to hold that indirect purchaser plaintiffs asserting state law claims must establish Article III standing at the pleading stage, by alleging facts that they reside in or purchased products in the applicable state. She also follows Northern District of California precedent in holding that ‘antitrust standing’ is a required pleading element, and in finding that the AGC factors for assessing ‘antitrust standing’ will be applied at the pleading stage in antitrust cases involving indirect purchaser claims. She also concludes that the AGC analysis extends not only to indirect purchaser claims brought under the Sherman Act, but also to indirect purchaser claims under individual state repealer statutes where the courts of the applicable state have “clearly indicated” that federal law should be followed in construing the state statute.
According to Judge Freeman, California courts have “clearly indicated” that AGC applies to state law antitrust claims brought under the California Cartwright Act. Therefore, plaintiffs alleging antitrust violations under both the federal Sherman Act and the California Cartwright Act must plead facts to support ‘antitrust standing’ under AGC.
Elizabeth C. Pritzker
Pritzker Levine LLP
. . . While Batteries Plaintiff Class Surmounts AGC Challenge
In re Lithium Ion Batteries Antitrust Litig., Case No. 13-MD-2420-YGR(N.D. Cal. October 2, 2014), 2014 U.S. Dist. LEXIS 141358. This multidistrict litigation involving both direct, indirect and governmental purchasers stems from allegations of a multi-year conspiracy among Japanese and Korean companies and their U.S. subsidiaries to fix the prices of lithium ion battery cells, the chemical core of rechargeable batteries in consumer electronics. On October 2, 2014, District Court Judge Yvonne Gonzalez Rogers issued a 78-page opinion addressing several Rule 12(b)(6) pleading challenges raised by defendants. Two key issues raised by the motions involved questions of antitrust standing under Assoc. Gen. Contractors v. Cal. State Council of Carpenters (“AGC”), 459 U.S. 519 (1983), and antitrust injury traceable to a purchase from an entity owned or controlled by an alleged conspirator under Royal Printing Co. v. Kimberly Clark Corp. (“Royal Printing”), 621 F.3d 323 (9th Cir. 1980). The Court found that the direct and indirect purchaser complaints largely satisfied the requirements of AGC andRoyal Printing and denied the motions to dismiss in all respects except as to allegations asserted by one direct purchaser plaintiff against Hitachi-branded lithium ion batteries and camcorders containing those batteries.
This is a multidistrict action stemming from allegations that several Japanese and Korean defendant families and their U.S. subsidiaries, including LG Chem, Samsung, Panasonic, Sanyo, Sony, Hitachi, Maxell, GS Yuasa, NEC and Toshiba, conspired to fix the prices of lithium ion battery cells. As alleged in the complaints, lithium ion cells are the chemical core of a lithium ion battery. The cells are manufactured in a raw state, and then one or more cells are “packed” into a casing that makes them suitable for use as lithium ion batteries. The cells are useless unless packed, and the cost of manufacturing the cell makes up a substantial majority of the cost of a completed battery. Lithium ion batteries are the predominant form of rechargeable battery used in consumer electronic products.
Plaintiffs allege the conspiracy caused injury to both direct and indirect purchasers of lithium ion batteries and products containing them in the form of alleged price overcharges. The direct purchaser plaintiffs filed suit on behalf of purchasers of lithium ion batteries and products, seeking injunctive relief and damages under the federal Sherman Antitrust Act. The indirect purchaser plaintiffs include persons, businesses and municipal and regional governments injured by the alleged overcharge; these plaintiffs filed suit for injunctive relief under the Sherman Act, and for damages under various state antitrust and consumer laws.
The Court’s Order:
The Court’s order is part of a phased series of orders that address specific issues of law. In a prior order issued on January 21, 2014, Judge Gonzalez Rodgers upheld the parties’ initial consolidated complaints finding that both complaints plausibly alleged a conspiracy going back to 2002, but granted defendants’ motions to dismiss with respect to the direct purchaser plaintiffs only, finding that the complaints failed to plead antitrust standing under Royal Printing. The Court reserved issues relating to the indirect purchaser plaintiffs’ antitrust standing underAGC, which were briefed and argued after the plaintiffs amended their respective complaints following the Court’s January 21 order.
The Court’s October 2 order begins with an analysis of the indirect purchaser plaintiffs’ antitrust standing under AGC. In AGC, the Supreme Court reasoned that “[a]n antitrust violation may be expected to cause ripples of harm to flow through the Nation’s economy, but despite the broad wording of § 4 [of the Clayton Act] there is a point beyond which the wrongdoer should not be held liable.” AGC, 459 U.S. at 534 (quoting Blue Shield of Virginia v. McCready, 457 U.S. 465, 476-77 (1982) (internal quotation marks omitted)). To determine where the point lies in a particular case, courts must “evaluate the plaintiff’s harm, the alleged wrongdoing by the defendants, and the relationship between them.” Id at 535. To guide this evaluation, courts employ a five-factor balancing test for determining whether plaintiffs suing for damages under Section 4 of the Clayton Act, despite having been injured in their business or property by reason of something forbidden in the antitrust laws, are nevertheless too “remote” from the alleged cause of the injury for federal law to countenance a recovery. Id. at 530-35.
Because the indirect purchaser plaintiffs sought damages under various state antitrust laws -- and not under federal law -- the Court first focused on whether the AGC test for antitrust standing applies to a particular state-law claim asserted by indirect purchasers in the complaint. Second, if AGC was found to apply, the Court considered whether its application barred a particular state-law claim asserted in the indirect purchaser complaint.
In determining whether the AGC test for antitrust standing applies to a particular state-law claim, the Court surveyed cases from several jurisdictions. The Court rejected the notion that harmonization statutes are sufficient, in and of themselves, to invoke AGC’s application: “[S]imply because a state statute encourages reference to federal law does not impose a mandate on state courts to conform in fact to federal law.” Order at 20. Using similar reasoning, the Court parted ways with decisions by other courts in the Northern District of California, and held that a recent case from the California Supreme Court (Areyh v. Canon Business Solutions, Inc., 55 Cal. 4th 1185, 1195 (2013)) severely weakens any argument that California courts apply the AGC test to antitrust claims brought under the California Cartwright Act. Order, at 20-21. According to Judge Gonzalez Rogers, the appellate courts of only three states -- Nebraska, New Mexico, and Nevada --have “affirmatively announce[d] after a reasoned analysis that their high courts do or would apply AGC as applied in the federal courts.” Id. at 17, 21-22. “For the remaining states,” the Court concluded, “the authority is too uncertain to conclude they would apply AGC without any modification, making indirect-purchaser standing more readily available.” Id. at 22.
Rejecting defendants’ argument that each state identified by defendants would apply AGC, Judge Gonzales Rogers nonetheless concluded that the indirect purchaser plaintiffs “adequately alleged facts to satisfy AGC for pleading purposes.” Order at 22. Under AGC, courts consider (1) the nature of plaintiffs’ injuries and whether plaintiffs were participants in the relevant markets; (2) the directness of the alleged injury; (3) the speculative nature of the alleged harm; (4) the risk of duplicative recovery; and (5) the complexity in apportioning damages. Order at 23 (citing Am. Ad. Mgmt., Inc. v. Gen. Tel. Co. of California, 190 F.3d 1494, 1505 (9th Cir. 1996)).
The Court held that plaintiffs satisfied the first AGC factor, finding that the indirect purchaser plaintiffs had adequately pled markets for battery cells, batteries and batteries which were plausibly pled to be inextricably intertwined. Order at 25. Plaintiffs also had adequately pleaded that they purchased batteries and battery products with cells allegedly traceable to defendants, and that the batteries in which the cells are incorporated “do not undergo any physical alterations as they move through the chain of distribution.” Id. Plaintiffs also pled that the battery cell is a “substantial part of a [battery] product” that comprises a “substantial component cost” of such products.” Id. Additionally, plaintiffs alleged that price increases associated with components, such as batteries, can be isolated through regression analyses such that the impact of the overcharge “can be measured and quantified.” Id. The Court held that ‘[s]imilar allegations have been deemed sufficient for pleading purposes.” Id. at 25-26.
Turning to the second AGC factor, directness of injury, the Court found that plaintiffs’ allegations that the overcharge was “passed on to them by direct purchaser manufacturers, distributors and retailers” and coupled with plaintiffs’ allegations distribution chain is such that a distinct and identifiable overcharge moves automatically through its layers to consumer purchasers was “not too indirect to favor standing under AGC.” Order at 29.
With respect to the third AGC factor, speculative nature of the harm, the Court held that plaintiffs’ allegations that the price of the allegedly fixed battery cell can be traced to show the changes in prices paid by direct purchasers of batteries affect prices paid by indirect purchasers of batteries and battery products, using expert and regression analyses, was sufficient to establish antitrust standing. “The IPP’s allegation that they have suffered somedamage, along with a method of demonstrating the fact of their damage, satisfies the Court that this factor tips in favor of standing for purposes of the pleading stage.” Order at 30 (italics in original).
Reasoning that the fourth and fifth AGC factors -- risk of duplicative recovery and unduly complex apportionment of damages -- “are two sides of the same coin,” the Court considered these factors together. And, while defendants argued that there was a risk of undue complexity in the apportionment of damages, the Court found that “this factor does not weigh against standing.” Id. at 31. “...[D]efendants do not explain why damages could not be apportioned in this case, as they have in other complex antitrust cases, such that the case should be dismissed on the pleadings alone. It is a rule of long standing ‘that in complicated antitrust cases plaintiffs are permitted to use estimates and analysis to calculated a reasonable approximation of their damages.’” Id (citing Loeb Indus., Inc. v. Sumitomo Corp., 306 F.3d 469, 493 (7th Cir. 2002)).
Turning its attention from the indirect purchaser case to the direct purchaser case, the Court then went through a detailed analysis of the direct purchaser plaintiffs’ antitrust standing underRoyal Printing. With respect to Royal Printing’s requirements, the Court observed: “the DPPs must allege facts that lead to a plausible inference that they have suffered an antitrust injury traceable to a purchase from an entity owned or controlled by an alleged conspirator.” Order at 46.
The Court held that the direct purchasers satisfied the pleading requirements of Royal Printing, except in one narrow circumstance. Specifically, the Court held, direct purchasers alleged the particular batteries and battery products purchased by each direct purchaser plaintiff, specifying type, brand and model number. Order at 46. With respect to battery products, the Court found that plaintiffs’ allegations that the products bore distinctive markings of a defendant met Royal Printing’s traceability requirement. Id. The complaint also was held to satisfy traceability by limiting the direct purchaser plaintiff claims to those purchases involving battery cells packed by a defendant or its co-conspirator, a separate company on defendant’s behalf “where title to said cells did not transfer” or by companies owned or controlled by defendants or their co-conspirators. Id at 47.
Importantly, Judge Gonzalez Rogers rejected defendants’ efforts to limit antitrust standing only to direct purchaser plaintiffs and only to purchases made by direct purchasers from a particular defendant that either owned or controlled a seller. Order at 49. As the Court held, “Royal Printing permits indirect purchasers who buy from any seller owned or controlled by anyconspirator to sue all of the conspirators on a theory of joint and several liability.” Id (italics in original).
The Court found “one exception” to the direct purchaser plaintiffs’ “otherwise adequate pleading of purchases of price-fixed components through a chain of co-conspirators or entities under their ownership or control.” Order at 49-50. One plaintiff, Alfred H. Siegel, sued in his capacity as a liquidating trustee for Circuit Stores, Inc. Liquidating Trust, alleging that Circuit City purchased Hitachi-branded lithium ion batteries and camcorders from a sibling entity of an alleged conspirator. Id. at 50. Although the sibling entities shared a common corporate parent, there were no allegations that the corporate parent engaged in any wrongdoing. “As such,” the Court held, “the DPPs fail to satisfy Royal Printing with respect to Circuit City’s alleged purchases of Hitachi batteries and camcorders from Hitachi America Ltd.” Id. at 50-51.
Implications for Indirect Purchaser Claims in California Antitrust Actions
Judge Gonzalez Rogers follows Northern District of California precedent in holding that ‘antitrust standing’ is a required pleading element, and in finding that the AGC factors for assessing ‘antitrust standing’ will be applied at the pleading stage in antitrust cases involving indirect purchaser claims. She concludes, however, that no California court has clearly held that AGC applies to antitrust claims under the California Cartwright Act. Therefore, under this ruling, AGC does not limit claims brought under California law.
Judge Gonzalez Rogers relies on detailed pleading allegations regarding product and component branding, distinctive marking, title and corporate ownership, control or direction to find that direct purchaser plaintiffs satisfy antitrust standing under Royal Printing. Royal Printing does not limit standing only to direct purchases from a particular defendant/conspirator. Joint and several liability remains the standard. “Royal Printing permits indirect purchasers who buy from any seller owned or controlled by any conspirator to sue all of the conspirators on a theory of joint and several liability.” Order at 49.
Elizabeth C. Pritzker
Pritzker Levine LLP
Adobe Data Breach/Privacy Challenge Survives Standing Assault
In re Adobe Systems, Inc. Privacy Litigation, Case No. 13-cv-05226-LHK (N.D.Cal. September 4, 2014), 2014 U.S. Dist. LEXIS 124126. On September 4, 2014, the Hon. Lucy Koh issued an order granting, in part, Adobe’s motion to dismiss various claims arising from an intrusion into Adobe’s computer network in the summer and fall of 2013 and a resulting data breach.
Plaintiffs allege four causes of action related to the intrusion and breach on behalf of contract and damages classes affected by the intrusion: (1) injunctive relief for violations of the California Customer Records Act, Civil Code §§ 1798.81.5 and 1798.82; (2) declaratory relief; (3) declaratory and injunctive relief for violations of the California Unfair Competition Law (“UCL”), Bus. & Prof. Code § 17200 et seq., and (4) restitution under the UCL. Adobe moved to dismiss all causes of action.
Adobe’s primary arguments in support of its motion involve standing. Adobe argued that because plaintiffs had not alleged that they, in fact, had suffered harm (such as unauthorized credit card use) from the misuse of their personal or credit card data, plaintiffs failed to satisfy the requirements for Article III standing. The precise legal question presented by the motion was whether the recent Supreme Court decision in Clapper v. Amnesty, Int’l USA, __ U.S. __, 133 S.Ct. 1138, 1146 (2013), which rejected “[a]llegations of possible future injury” as a basis for Article III standing, requiring instead that a “threatened injury  be certainly impending to constitute injury in fact (Clapper, 122 S.Ct. at 1147), supplants the framework articulated by the Ninth Circuit in Krottner v. Starbucks (9th Cir. 2010) for Article III standing in the context of stolen personal information. Krottner holds that “the possibility of future injury may be sufficient to confer standing” where the plaintiff is “immediately in danger of sustaining some direct injury as the result of the challenged conduct.” Id at 1142.
Adobe argued that Clapper changed the law governing Article III standing, and that Krottner is no longer good law. Judge Koh disagreed, finding that the two decisions were not “clearly irreconcilable.” On the contrary, Judge Koh held, the difference in phrasing between the Ninth Circuit’s decision in Krottner, which requires the degree of imminence a plaintiff must allege to have standing as “immediate  danger of sustaining some direct injury,” and a “credible threat of real and immediate harm” and the Supreme Court’s decision in Clapper, which describes the harm as “certainly impending,” was not substantial. Judge Koh went on to conclude that the threatened harm alleged by the plaintiffs -- the risk that their personal data would be misused by hackers that breached Adobe’s network -- is both immediate and real. Such allegations, the Court held, suffice to establish Article III injury-in-fact standing at the pleadings stage, under both Krottner and Clapper. Plaintiffs who allege they incurred costs to mitigate the increased risk of harm (by purchasing credit monitoring services, for example) also had a second, additional basis to assert Article III injury-in-fact standing, the Court found.
The Court granted Adobe’s motion to dismiss, in part, on two grounds.
Plaintiffs allege an additional claim under the Consumer Records Act stemming from Adobe’s alleged failure to reasonably notify customers about the breach. Judge Koh held that plaintiffs did not allege an injury resulting solely from the failure to provide reasonable notification; thus, plaintiffs could not establish Article III standing for this particular claim. The motion to dismiss was granted, in part, and with leave to amend on this ground. Plaintiffs declined to amend.
Two of the six named plaintiffs did not specifically allege they would not have purchased Adobe products had they known Adobe was not providing the reasonable security that Adobe represented it would provide. Judge Koh dismissed the UCL claim as to these two plaintiffs only, again with leave to amend, finding that these plaintiffs had not pled that they personally lost money or property as a result of the alleged unfair competition as required for UCL claims.
Elizabeth C. Pritzker
Pritzker Levine LLP
April 10, 2014
McSweeny Confirmed as FTC Commissioner. After a year-long vacancy, the FTC is finally complete with the 95-1 vote in favor of confirmation for Terrell McSweeny, who served as a senior antitrust attorney for the U.S. Department of Justice. For more details, see this article.
February 28, 2014
Post- KWIKSET: Labels Do Matter -- Exploring the "All Natural" Jurisprudence
In 2011, the California Supreme Court held in Kwikset Corp. v. Superior Court, 51 Cal. 4th 310 (2011), that product labels needed to be truthful and upheld standing to bring actions under the UCL to challenge false, deceptive and unfair labeling. Kwikset involved clams that "Made in America" product labels misrepresented the fact that the goods were manufactured abroad. Finding that plaintiffs relied on the "Made in America" label in purchasing the product, the court ruled that plaintiffs were injured when they purchased a product, even a useful product, which was not accurately labeled.
Subsequently, there has been an explosion of recent litigation that has sought to challenge products labeled "all natural" on grounds that an analysis of their ingredients shows violations of the standards set by the Court in Kwikset. Challenges to product labeling have also included deceptive or false descriptive labels. The legal claims involve alleged violations of the Unfair Competition Law (UCL), False Advertising Law (FAL) and the state Sherman Law. This brief surveys a sampling of recent cases under California law to analyze when "all natural" or similar claims may be successfully disputed and when they may be sustained.
Sufficiency of Complaints -- Definition of Claims -- Standing
Balser v. Hain Celestial Group, No. 2:13-cv-05604 (C.D. Cal., December 18, 2013). Motion to Dismiss Granted. False Advertising class action against Alba Botanica for misuse of words "all natural" and "100% vegetarian." Plaintiffs argued that "natural" meant "existing in or produced by nature, not artificial." Defendant maintained a website which defined the terms: "we don't use parabens, sulfates or phthalates" and "vegetarian" means "without animal products," not "only from vegetable matter." The product labels defined what products are natural and what ingredients are excluded, amid a complete list of all ingredients maintained. In dismissing the complaint with prejudice, Judge Real found plaintiffs' theory of the case flawed as shampoos or lotions are not natural to begin with, ("they do not exist in nature nor do they grow on trees") and thus plaintiffs knew that the products were manufactured and could not have been deceived by a broad definition of "natural."
Judge Illston granted a similar motion to dismiss, albeit with leave to amend, in the case ofFigy v. Amy's Kitchen, No. 3:13-cv-03816 (N.D. Cal., November 25, 2013). Amy's Kitchen sells a number of products containing "evaporated cane juice." Plaintiffs sued under the unlawful prong of the UCL, arguing that "evaporated cane juice" must be listed under its common and usual name, which is "sugar." The listing, they further alleged, violates Federal labeling laws and deceives the plaintiff class who, it is alleged, believe that omitting the words "sugar" or "syrup" in favor of the term "juice" both downplays the inclusion of "sugar" as an ingredient and misleads plaintiffs into believing that "juice" is a healthier ingredient than sugar or sugar syrup. In dismissing the initial complaint for lack of standing, Judge Illston ruled that the plaintiff must show actual reliance on the misrepresented ingredient and that the "misrepresentation was an immediate cause of the injury-causing conduct." She interpreted that to mean that plaintiff needed to allege he would not have bought the product but for the misrepresentation and that he saw the misrepresentation prior to purchasing the product, as analyzed in Kwikset. Plaintiffs filed an amended complaint in December, 2013, which is now subject to further motion to dismiss.
Swearingen et al. v. Yucatan Foods, L.P., No. 3:13-cv-03544 (N.D. Cal., February 7, 2014).Order Denying Motion to Dismiss. Judge Seeborg denied defendants' motion to dismiss UCL, Sherman Law, and FAL claims again involving "evaporated cane juice" in guacamole products. Judge Seeborg analyzed plaintiff's standing under the UCL. In particular, plaintiff relied on the "unlawful" prong of the UCL by referring to FDA regulations and draft guidance letters in 2009 that the term evaporated cane juice "falsely suggests that the sweeteners are juice." Plaintiff argued that this term misleadingly suggests that the product is healthier than it is, as "juice" connotes a healthful product. The court did not find that the plaintiff needed to plead actual reliance on the mislabeled product's representations in order to have standing to challenge them.
Kane v. Chobani, Inc., No. 12-cv-02425 (N.D. Cal., February 20, 2014) Order Granting Motion to Dismiss With Prejudice. Judge Koh took the opposite approach in granting defendant's motion to dismiss claims that the yogurt manufacturer misrepresented both its "all natural" ingredients and its disclosure about "evaporated cane juice." After Plaintiff had re-pled the complaint three times and there were several hearings before the court, Judge Koh found that Kwikset required plaintiff's reliance on the misrepresentation to be pled to a standard of particularity under FRCP 9(b). Plaintiff did plead that she read the product ingredients and her understandings of the terms. As the judge analyzed plaintiff's claims, she found them "implausible" because they contradicted other statements made in the complaint or before the court on plaintiff's understanding of the meaning of "evaporated cane juice" and the quality in the "all natural" claims of color added to the product. In sum, plaintiff had not articulated a theory of how defendant's labels misrepresented the ingredients so that plaintiff was injured.
Motion for Class Certification
In an Order Denying Motion for Class Certification, Astiana v. Ben & Jerry's Homemade, Inc., No. 4:10-cv-04387 (N.D. Cal., January 7, 2014), Judge Hamilton denied certification to a class of purchasers of ice cream, frozen yogurt and popsicles which contained "alkalized cocoa" but were labeled "all natural." Plaintiffs claimed it was deceptive to package and advertise products as "all natural" when the ingredient cocoa was manufactured with a synthetic alkalizing product. The evidence showed that Ben & Jerry's used several different suppliers of cocoa, only one of which produced a product with a synthetic alkalizing agent. The others used natural agents in the production of cocoa. The Court questioned whether plaintiffs had met the standards of ascertainability (because it was impossible to determine which products contained the synthetic alkali), standing (because the evidence was inconclusive as to whether plaintiff relied on the "all natural" label and premium pricing prior to her purchase) and commonality (because "all natural" did not have a common meaning and plaintiffs had not produced any evidence that use of the term was evidence of intent to deceive.) Ultimately, while the court was willing to find some evidence toward each of the Rule 23 (a) criteria, she found predominance of common issues over individual issues lacking. Plaintiffs had submitted no expert evidence to show a common meaning of a consumer's valuation of the term "all natural;" no evidence toward damages as defendant sold wholesale only and all products were priced the same, regardless of the "all natural" label; and plaintiff has submitted no evidence showing FDA policy requirements of ingredients were violated. Further, the court noted that injury and damages is a component of every claim raised by plaintiffs and the lack of expert evidence establishing either was fatal to certification as there was no evidence submitted to show class-wide relief was available.
Similarly, Judge Fischer in the Central District denied class certification to a putative class of customers of Chipotle Grill who maintained they were deceived by Chipotle's practice of touting "naturally raised" meats, but substituting conventionally raised meat when the other was not available without changing its signage or menus. Order Denying Motion for Class Certification, Hernandez v. Chipotle Mexican Grill, Inc., No. 2:12-cv-05543 (C.D. Cal., December 2, 2013). Chipotle defined "naturally raised" meats as "coming from animals that are fed a pure vegetarian diet, never given antibiotics or hormones, and raised in a human environment." Chipotle had a practice of substituting the conventional product when naturally raised product was not available. Certification was denied on predominance grounds because the switch to conventionally raised meats took place as to varying products at varying places within a limited time frame. Even Chipotle would have a difficult time of delineating when the substitution occurred and for which products. Moreover, class members would not have retained sufficient records of these purchases nor could they be obtained from the stores. It proved near impossible to identify which meat was purchased in which transaction from stores that switched back and forth between "naturally raised" and conventionally raised meats. While Chipotle sometimes posted notices of the substitution at the point of purchase, the court determined that individual inquiry was necessary to determine whether a class member had seen the sign, or relied on the usual advertising or menu. The court further held that the class action mechanism was not fair or efficient as it would be near impossible to determine who was in the class and how any settlement could be distributed fairly.
Motion for Summary Judgment
Order Granting in Part and Denying in Part Defendants' Motion for Summary Judgment,Ogden v. Bumble Bee Foods, LLC, No. 5:12-cv-01828 (N.D. Cal., January 2, 2014). The case involved the false advertising and misrepresentations in claims of "Omega -3" nutrient content in tuna products. The claims were that the tuna was an "excellent source" and "rich" in "Omega-3," while no more specific nutrient content was provided. Various health claims were also challenged, as was a heart symbol, connoting health, which appeared on the packaging. Judge Koh granted in part and denied in part defendants' motion for summary judgment, evaluating the plaintiff's evidence produced in support of her claims. Actual reliance on the misrepresentation was required and, at the summary judgment stage, the party seeking summary judgment must produce evidence demonstrating an absence of an issue of general material fact to prevail. Here the court reviewed plaintiff's deposition and other uncontradicted statements and found that plaintiff had sufficiently proved antitrust injury and therefore standing, to challenge the "Omega-3" misrepresentations because she testified she was aware of statements on the packaging before she purchased. However, her acknowledgement that she had not read health claims on the defendant's website meant that those claims were dismissed for lack of standing. The court also found that the UCL and FAL provided a private right of action for consumers to challenge violations of the FDCA and the Sherman Law.
Motion for Settlement
Judge Orrick preliminarily approved a class action settlement with Trader Joe's that alleged that several products advertised and sold by Trader Joe's contained synthetic products, despite being labeled "all natural." Larsen et al v. Trader Joe's Co., No. 3:11-cv-05188 (N.D. Cal., February 7, 2013). The products (cookies and juices) variously contained alkali processed cocoa; ascorbic acid, a synthetic form of Vitamin C; sodium acid pyrophosphate; xanthan gum and vegetable monoglycerides, all of which were alleged to be synthetic ingredients. The lawsuit alleged violation of FDA standards that products are not natural if they contain color additives, artificial flavors, or synthetic substances. The class consists of tens of thousands of consumers nationwide who purchased the products from October 2007 to the present. The settlement established a class fund of $3.375 million from which claims will be paid. Consumers with proof of purchase will receive the average price of goods purchased while those without proof will be eligible for a flat reimbursement amount.
Susan Kupfer is a partner at Glancy Binkow & Goldberg, LLP, San Francisco.
August 14, 2013
On August 13, 2013, the U.S. Department of Justice along with the Attorneys General of six states (not including California), filed suit to block the merger of US Airways and American Airlines. In its press release announcing the suit, the DOJ contended that “[i]f this merger goes forward, even a small increase in the price of airline tickets, checked bags or flight change fees would result in hundreds of millions of dollars of harm to American consumers," and also noted that "[b]oth airlines have stated they can succeed on a standalone basis and consumers deserve the benefit of that continuing competitive dynamic.” Press release and complaint are available at the Antitrust Division’s website.
June 24, 2013
On June 20, 2013, the U.S. Supreme Court handed down its opinion in American Express Co. v. Italian Colors Restaurant. The opinion considered “whether a contractual waiver of class arbitration is enforceable under the Federal Arbitration Act when the plaintiff’s cost of individually arbitrating a federal statutory claim exceeds the recovery.” Slip op. at 1. The federal statutory claim in question was a Sherman Act claim, and the Court held that the arbitration clause was enforceable.
June 17, 2013
On June 17, 2013, the U.S. Supreme Court issued its opinion in FTC v. Actavis, Inc., holding that “reverse payment” settlement agreements between a patent holder pharmaceutical and potential generic competitors were subject to a rule of reason analysis and were not immune from antitrust scrutiny.
March 28, 2013
On March 27, 2013 the U.S. Supreme Court issued its opinion in Comcast v. Behrend, reversing the Third Circuit’s affirmation of class certification in an antitrust case, and holding that the plaintiff’s expert report was insufficient in light of the legal theory supporting class certification. The slip opinion is available HERE.
March 22, 2013
On March 14, 2013, the California Court of Appeal handed down a new opinion construing the Unfair Competition Law in the context of actions between business competitors. In the opinion, the Court of Appeal reversed the judgment sustaining the defendant’s demurrer and reinstated the action, holding that the competitor plaintiff had standing to bring the claim. Read the full opinion at this link: http://www.courts.ca.gov/opinions/documents/G046778.DOC