Antitrust and UCL in the News


From the November 2016 E-Brief

Cathode Ray Tube Court Rules That “Price-Ladder” Damages Are Analytically Different From “Umbrella” Damages

David Goldstein
Orrick, Herrington & Sutcliffe LLP

In Cathode Ray Tube, Judge Jon S. Tigar recently denied the defendants’ effort to exclude evidence supporting the Direct Action Plaintiffs’ (DAP) “price-ladder theory,” an approach commonly used in price-fixing cases to prove damages across a range of products that were not the direct subject of an agreement to fix prices. In re Cathode Ray Tube (CRT) Antitrust Litig., No. C-07-5944 JST, 2016 WL 6246736 (N.D. Cal. Oct. 26, 2016).  The CRT DAPs claim that the defendants agreed to raise prices for 15-inch CRTs, and that the price increase had the effect of raising prices for Larger-Sized CRTs. The defendants argued that the DAPs should not be permitted to pursue damages based on their price-ladder theory for two reasons, both of which the court rejected.

First, the defendants argued that the DAPs were required to prove that the conspiracy had both the effect and purpose of fixing prices, but had no evidence that raising prices for Larger-Sized CRTs was the purpose of the agreements to raise prices for 15-inch CRTs. The court ruled that the defendants were wrong for two reasons.  One, the Supreme Court has made clear that “a civil antitrust violation can be established by proof of either an unlawful purpose or an anticompetitive effect.” Id. at *3 (citing United States v. Gypsum, 438 U.S. 422, 436 n.13 (1978) (emphasis added)). Two, whether there was an agreement to fix prices of Larger-Sized CRTs was a question for the jury, and, in any event, the DAPs could pursue a claim based on increased prices for Larger-Sized CRTs if agreements to fix prices of 15-inch CRTs “were a means by which [defendants] distorted the price of Larger-Sized CRTs.” Id.

Second, the defendants argued that the DAPs should be prohibited from pursuing damages based on their price-ladder theory because any such damages are derivative of the conduct of reaching agreements on prices for 15-inch CRTs. The defendants analogized price-ladder damages to umbrella damages, and argued that the Ninth Circuit and other courts have rejected umbrella damages as “unacceptably speculative.”

The court explained that umbrella damages are damages based on sales by a non-conspirator, on the theory that price-fixing among the conspirators affected market prices generally and, therefore, prices charged by non-conspirators. Id. at *4. After discussing the split in authority regarding the recoverability of umbrella damages, the court ruled that any concern that umbrella damages are remote, speculative, complex and potentially duplicative was irrelevant under the circumstances because the DAPs seek price-ladder damages from alleged conspirators, not non-conspirators. Id. at *5.

The court then provided its view that, in any event, Ninth Circuit law does not prohibit umbrella damages where the plaintiffs, like the DAPs, are only one step removed from the defendants in the distribution chain. Id. Judge Tigar pointed out that although in Petroleum Products, the Ninth Circuit “denied standing to sue for umbrella damages where the plaintiffs were several steps removed from the defendants in the distribution chain,” it expressly stated that it was not ruling on “‘whether, in a situation involving a single level of distribution, a single class of direct purchasers from non-conspiring competitors of the defendants can assert claims for damages against price-fixing defendants under an umbrella theory.’” Id. (quoting In re Coordinated Proceedings in Petroleum Prods. Antitrust Litig., 691 F.2d 1335, 1340 (9th Cir. 1982)). Judge Tigar then noted that prior to Petroleum Products some district courts in the Ninth Circuit had allowed plaintiffs to pursue umbrella damages, but since Petroleum Products some have not. Id

The court focused on—and criticized—the decision in Antoine L. Garabet, M.D., Inc. v. Autonomous Tech. Corp., 116 F. Supp. 2d 1159 (C.D. Cal. 2000), in which the court applied the Associated General Contractors five-part standing test to deny a plaintiff standing to seek umbrella damages. Judge Tigar disagreed with Gabaret’s view that independent pricing decisions of non-conspirators make any resulting injury and damages indirect and speculative, because successful cartels raise the market price for a price-fixed good and not just the price charged by the conspirators. Id. at *6. Judge Tigar also did not agree with Gabaret’s suggestion that umbrella damages implicate Illinois Brick’s concerns regarding pass-on and duplicative recovery for indirect purchasers. Id. at *7. Finally, he disagreed with Gabaret to the extent its ruling was based on the notion that claims for umbrella damages should be brought by the non-conspirator sellers, because those sellers were not harmed by—and, in fact, may have benefitted from—the artificial increase in market prices. Id.

The court issued several other rulings that plaintiffs and defendants in price-fixing cases should keep in mind as they develop evidence supporting their claims and defenses:

  • DAPs must disclose, and the parties must meet and confer, the day before the DAPs seek to admit non-hearsay co-conspirator statements to tee up for the court rulings on their admissibility. Id. at *1-2.
  • Defendants may present evidence of pro-competitive justifications for information exchanges to show they served a legitimate business purpose, but not for any other reason, subject to a Rule 403 objection at trial. Id. at *8-9.
  • DAPs (and their experts) are allowed to argue that documents produced in discovery reflect only a portion of the alleged conspiratorial conduct, based on documents that say “destroy after reading.” Id. at 9-10.
  • DAPs are allowed to present evidence of the defendants’ participation in trade organizations, as well as references to exchanges of production information among trade association members. Id. at *10.
  • DAPs are not allowed to offer a defendant’s interrogatory answer in which it admitted conspiring with another defendant because the response is inadmissible hearsay as to the other defendant. Id. at 10-11.

Eastern District of Missouri Denies St. Louis Metropolitan Taxicab Commission’s Motion to Dismiss Based on State Action Immunity in Antitrust Lawsuit Brought by Uber

Jason Bussey
Lindsey Bohl
Simpson Thacher & Bartlett LLP


On October 6, 2016, a Missouri federal district court denied a motion to dismiss an antitrust lawsuit brought by Uber Technologies Inc. (“Uber”) against the St. Louis Metropolitan Taxicab Commission (“MTC”), rejecting the MTC’s argument that it is a governmental entity entitled to immunity from liability under Section 1 of the Sherman Act. Wallen v. St. Louis Metro. Taxicab Comm’n, No. 4:15CV1432 HEA, 2016 WL 5846825 (E.D. Mo. Oct. 6, 2016) (“Wallen”). The district court relied on N.C. State Bd. of Dental Examiners v. Fed. Trade Comm’n  (“N.C. Dental”). There, the Supreme Court held that a non-sovereign governmental agency controlled by participants in the market the agency regulates enjoys immunity from federal antitrust laws only if anticompetitive conduct attributed to the agency furthers a clearly articulated policy of, and was actively supervised by, the State itself. See id. at *3; N.C. Dental, 135 S. Ct. 1101, 1114 (2015). In Wallen, the court found that MTC failed to establish a clearly articulated state policy to displace competition, and therefore denied state action immunity without deciding whether a board comprised of less than one-half active industry participants could be “controlled” under N.C. Dental. Wallen at *4.

State Action Immunity Doctrine 

States are generally immune from antitrust liability when they directly impose market restraints “as an act of government.” Parker v. Brown, 317 U.S. 341, 352 (1943). When States delegate power to non-sovereign actors such as state trade agencies, however, immunity is not automatic.  Under the Court’s holding in California Retail Liquor Dealers Assn. v. Midcal Aluminum, Inc, (“Midcal”), a state law or regulatory scheme cannot provide the basis for antitrust immunity unless, first, the State has articulated a clear policy to allow the anticompetitive conduct, and second, the State provides active supervision of the policy. 445 U.S. 97, 105 (1980).

In 2015, the Supreme Court revisited the state action immunity doctrine in N.C. Dental,135 S. Ct. 1101 (2015). In that case, the North Carolina Dental Board’s principal duty was to create, administer, and enforce a licensing system for dentists. Id. at 1107. The Board, six of whose eight members were practicing dentists, had broad authority over licensees, and it was permitted under the Dental Practice Act to file suit to “perpetually enjoin any person from ... unlawfully practicing dentistry.” Id. at 1107-08. In 2003, the Board began to issue cease-and-desist letters to non-dentists offering teeth-whitening services, a lucrative business that had previously been offered only by licensed dentists. See id. at 1108. The FTC later sued the Board, alleging that its concerted action excluding non-dentists from the market for teeth whitening services in North Carolina violated Section 5 of the Federal Trade Commission Act. Id. at 1108-09. The Board moved to dismiss on the basis of state action immunity. Id.

The question before the Court was whether the Board was entitled to antitrust immunity when it concluded that teeth whitening constituted the practice of dentistry, and enforced that policy by issuing cease-and-desist letters to non-dentist teeth whiteners. Both parties and the Court assumed that the first prong of Midcal (i.e., the clear articulation test) was satisfied by the Board’s broad authority to regulate and license dentistry. Id. at 1110. On the question of active supervision, the Court held that when a controlling number of the decision makers on a state licensing board actively participate in the occupation the board regulates, the board can invoke state-action immunity only if its actions are actively supervised by the state. Id. at 1114. In N.C. Dental, three-fourths of the Board members were practicing dentists, and the Court found that the Board’s efforts to prevent non-dentists from providing teeth-whitening services had not been supervised by the State, so the Board was not entitled to antitrust immunity. Id. Justice Alito’s dissent aptly noted that the Court left open the important question of whether the “controlling number” condition would be satisfied if market participants held only a minority of board seats. Id. at 1123 (Alito, J., dissenting).

Application of State Action Immunity in Wallen

The St. Louis-based action began when Uber alleged that the defendants, the MTC and its Commissioners, several of whom are market participants, violated Section 1 of the Sherman Act by blocking UberX from launching in St. Louis through onerous regulations. Wallen at *1. Defendant MTC moved to dismiss the case on the basis of state action immunity. Id. Defendant Taxi Cab companies also moved to dismiss based on failure to state a claim under respondeat superior, and immunity.  Id.

MTC argued in support of its motion to dismiss that the clear-articulation requirement from Midcal and Phoebe Putney was met because the Missouri State Legislature expressly delegated to the MTC “the power to license, supervise, regulate, inspect, and limit the number of licenses and permits available to taxicabs.” Defendant MTC and Defendant Commissioners’ Memorandum of Law in Support of their Motion to Dismiss or, in the alternative, Motion for a Judgment on the Pleadings at *7, Wallen v. St. Louis Metro. Taxicab Comm’n, No. 4:15CV1432 HEA, 2015 WL 9942788 (E.D. Mo. 2016). The MTC further argued that because a majority of the seats on the MTC were held by non-participants in the industry, it was not required to establish that state actors had reviewed the actions Uber challenged to qualify for antitrust immunity under N.C. Dental. Id. at *9.  

The district court denied the motion to dismiss, finding that the MTC failed to establish that the State, by delegating authority to license and regulate the taxicab industry, clearly articulated a policy to endorse anticompetitive action. Wallen at *4. The court cited N.C. Dental and noted that “Midcal ’s clear articulation requirement is only satisfied ‘where the displacement of competition [is] the inherent, logical, or ordinary result of the exercise of authority delegated by the state legislature.’” Id. at *3 (citing N.C. Dental, 135 S. 1111-12 (citing Fed. Trade Comm’n v. Phoebe Putney Health Sys. Inc., 133 S. Ct. 1003, 1011 (2013)). The court acknowledged that the MTC was statutorily authorized to, “[e]xercis[e] primary authority over ... licensing, control and regulations of taxicab services,” as well as “[l]icense, supervise, and regulate any person who engages in the business of transporting passengers in commerce” and “[e]nact a Taxicab Code ... relating to ... licensing, regulation, inspection, and enforcement….” Id. at *4. However, the court found that a close analysis of the MTC’s authority showed that its purpose was “to regulate and oversee vehicles for hire to ensure public safety standards and maintain the integrity of the public transportation system.” Id. The court then held that a “public transportation system that is safe and efficient” was the logical result of the statutory framework, not the “displacement of competition.” Id.

Because the court’s holding was based on the first prong of the Midcal test relating to a clear articulation of state policy, the court did not reach the second question of whether the MTC, made-up of less than a majority of active industry participants, was controlled by market participants and thus required to be actively supervised by the state in order to quality for immunity. See id. In contrast, another recent district court decision applying N.C. Dental to a state medical board in Texas regulating telemedicine first ruled on the “active supervision” prong of the Midcal test. Because the Texas Medical Board failed to show it was subject to active state supervision, the court did not address the clear articulation requirement. See Teladoc, Inc. et al v. Texas Medical Board, et al, at *17-18, No. 1-15-CV-343 RP (W.D. Tex. December 14, 2015).

Implications of Wallen  

In Wallen, the court based its ruling denying the defendants’ motion to dismiss on the fact that the MTC’s regulatory authority was not meant to displace competition, despite its authority to license and regulate market participants in commercial transportation. Id. at *4. In N.C. Dental, there was no question that market participants controlled the Board, leaving open the issue of whether a board controlled by less than a majority could be considered “controlling.” See N.C. Dental, 135 S. 1123 (Alito, J., dissenting). The Wallen court had an opportunity to address the controlling number issue directly with a board consisting of four market participants and nine members, but the district court instead chose to base its decision on the clear-articulation prong of the Midcal test. See Wallen at *5.

Although the holding in Wallen does not directly reach the controlling number issue, the decision potentially invites more actions from plaintiffs against professional boards that are made up of fewer than half market participants. The decision may also have more far-reaching implications for similar types of challenges brought by Lyft or Uber (and companies with similar models) against state and local boards with mandates to regulate vehicles for hire to ensure safety and efficiency standards. To the extent state actors wish to limit competition from ride-sharing services, they may amend their Board authorizing statutes and regulations to survive the Supreme Court’s clear-articulation test. Of course, state actors that allow prohibitive restrictions to be placed on the popular ride services will likely be held politically accountable by consumers who benefit from the often lower cost options and alternatives to traditional taxicab use. Wallen is just one example of many recent disputes between ride-hailing providers and taxicab companies that have put state legislators in the difficult position of creating a regulatory framework that levels the playing field for competition while at the same time ensuring that consumers are safe. 

Second Circuit Orders Dismissal of Price Fixing Complaint on International Comity Grounds in Vitamin C Antitrust Litigation

Robert E. Freitas
Weiwei He
Freitas Angell & Weinberg LLP

On September 20, 2016, the Second Circuit vacated a $147,000,000 judgment based on a jury verdict, reversed the district court’s denial of the defendants’ motion to dismiss, and remanded with instructions to dismiss to dismiss the complaint with prejudice in In re: Vitamin C Antitrust Litig., 837 F.3d 175 (2d Cir. 2016).
A plaintiff class consisting of U.S. buyers of vitamin C on the international market alleged that Hebei Welcome Pharmaceutical and North China Pharmaceutical Group Corporation, two companies organized under the laws of China, colluded with an entity referred to as both the “Western Medicine Department of the Association of Importers and Exporters of Medicines and Health Products of China” and the “China Chamber of Commerce of Medicines & Health Products Importers & Exporters” (“Chamber”), to “restrict their exports of Vitamin C in order to create a shortage of supply in the international market.” Id. at 180.

The defendants argued “that that they acted pursuant to Chinese regulations regarding vitamin C export pricing and were, in essence, required by the Chinese Government, specifically the Ministry of Commerce of the People’s Republic of China,” to engage in the challenged conduct. Id. They asked the district court to “dismiss the complaint pursuant to the act of state doctrine, the doctrine of foreign sovereign compulsion, and/or principles of international comity.” Id.

The defendants’ position was supported by a brief filed by the Ministry of Commerce. The Second Circuit called MOFCOM’s filing of an amicus curiae brief in support of the defendants’ motion to dismiss “historic,” noting that it was “the first time any entity of the Chinese Government has appeared amicus curiae before any U.S. court.” Id. n.5.

The MOFCOM brief explained that the Chamber is a “Ministry–supervised entity authorized by the Ministry to regulate vitamin C export prices and output levels.” Id. “According to the Ministry, the Chamber was an instrumentality of the State that was required to implement the Ministry’s administrative rules and regulations with respect to the vitamin C trade.” Id. at 181. Its “very purpose is to coordinate and supervise the import and export operations in this business, to maintain business order and protect fair competition, to safeguard the legitimate rights and interests of the state, the trade and the members and to promote the sound development of foreign trade in medicinal items.” Id.

MOFCOM also described a “price verification and chop” (“PVC”) policy that was implemented in 2002 and “in place during the time of the antitrust violations alleged in this case.” Id. at 182.

According to the Ministry, under this system, vitamin C manufacturers were required to submit documentation to the Chamber indicating both the amount and price of vitamin C it intended to export. The Chamber would then “verify” the contract price and affix a “chop,” i.e., a special seal, to the contract, which signaled that the contract had been reviewed and approved by the Chamber. A contract received a chop only if the price of the contract was “at or above the minimum acceptable price set by coordination through the Chamber.” Manufacturers could only export vitamin C if their contracts contained this seal.

Id. at 181-82 (citation omitted). MOFCOM asserted that the defendants “were required to coordinate with other vitamin C manufacturers and agree on the price that the Chamber would use in the PVC regime. In short, the Ministry represented to the district court that all of the vitamin C that was legally exported during the relevant time was required to be sold at industry–wide coordinated prices.” Id. at 182.

The defendants’ motion to dismiss was denied to allow for discovery, and, after discovery, their motion for summary judgment was denied. The district court “accepted the Ministry’s explanation as to its relationship with the Chamber,” but it “decline[d] to defer to the Ministry’s interpretation of Chinese law,” concluding that “the Ministry failed ‘to address critical provisions’ of the PVC regime that ‘undermine[d] [the Ministry’s] interpretation of Chinese law.’” Id. at 182. The district court “determined that ‘Chinese law did not compel Defendants’ anticompetitive conduct’ in any of the relevant time periods,” and denied their motion for summary judgment. Id.

The “central issue” considered by the Second Circuit was “whether principles of international comity required the district court to dismiss the suit.” Id. at 182. The analysis necessary to answer this question required the court to “determine whether Chinese law required Defendants to engage in anticompetitive conduct that violated U.S. antitrust laws.” Id. To do so, the court had to determine “the appropriate level of deference to be afforded a foreign sovereign’s interpretation of its own laws.” Id. The Second Circuit concluded that the district court “erred by concluding that Chinese law did not require Defendants to violate U.S. antitrust law and further erred by not extending adequate deference to the Chinese Government’s proffer of the interpretation of its own laws.” Id. at 182-83.

The Second Circuit reviewed the district court’s refusal to dismiss on international comity grounds for abuse of discretion, with the district court’s determination of foreign law reviewed de novo. Id. at 183. The court considered which “laws and standards control when U.S. antitrust laws are violated by foreign companies that claim to be acting at the express direction or mandate of a foreign government.” Id. at 179. “Specifically,” the court “address[ed] how a federal court should respond when a foreign government, through its official agencies, appears before that court and represents that it has compelled an action that resulted in the violation of U.S. antitrust laws.” Id. Review of the district court’s comity decision required a balancing of “the interests in adjudicating antitrust violations alleged to have harmed those within our jurisdiction with the official acts and interests of a foreign sovereign in respect to economic regulation within its borders.” Id. Importantly, the court concluded that when a foreign government provides “an official statement explicating its own laws and regulations,” as the government of China did in Vitamin C, “we are bound to extend that explication the deference long accorded such proffers received from foreign governments.” Id.

The Second Circuit described comity as “both a principle guiding relations between foreign governments and a legal doctrine by which U.S. courts recognize an individual’s acts under foreign law.” Id. at 183 (citing In re Maxwell Commc’n Corp., 93 F.3d 1036, 1046 (2d Cir. 1996)). “Comity, in the legal sense, is neither a matter of absolute obligation, on the one hand, nor of mere courtesy and good will, upon the other.” Id. (citing Hilton v. Guyot, 159 U.S. 113, 163–64 (1895)). “[I]t is the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protection of its laws.” Id. (citing Hilton, 159 U.S. at 163-64).

The Second Circuit applied the multi-factor balancing test set out in Timberlane Lumber Co. v. Bank of Am., 549 F.2d 597 (9th Cir. 1976) and Mannington Mills, Inc. v. Congoleum Corp., 595 F.2d 1287 (3rd Cir. 1979):

(1) Degree of conflict with foreign law or policy; (2) Nationality of the parties, locations or principal places of business of corporations; (3) Relative importance of the alleged violation of conduct here as compared with conduct abroad; (4) The extent to which enforcement by either state can be expected to achieve compliance, the availability of a remedy abroad and the pendency of litigation there; (5) Existence of intent to harm or affect American commerce and its foreseeability; (6) Possible effect upon foreign relations if the court exercises jurisdiction and grants relief; (7) If relief is granted, whether a party will be placed in the position of being forced to perform an act illegal in either country or be under conflicting requirements by both countries; (8) Whether the court can make its order effective; (9) Whether an order for relief would be acceptable in this country if made by the foreign nation under similar circumstances; and (10) Whether a treaty with the affected nations has addressed the issue.

Id. at 184-85. Most of the court’s discussion was focused on the first factor: whether the degree of conflict between the laws of two states rises to the level of a true conflict. The court noted that in Hartford Fire Ins. Co. v. California, 509 U.S. 764 (1993), the Supreme Court had relied on the absence of a “true conflict,” in the sense that compliance with the laws of both countries was impossible, in concluding that there was no basis for a comity-based determination that the exercise of jurisdiction was improper. 837 F.3d at 185.

Critical to the court’s determination of whether a true conflict was present was “the amount of deference that we extend to the Chinese Government’s explanation of its own laws.” Id. at 186. Relying on United States v. Pink, 315 U.S. 203 (1942), the court held that “when a foreign government, acting through counsel or otherwise, directly participates in U.S. court proceedings by providing a sworn evidentiary proffer regarding the construction and effect of its laws and regulations, which is reasonable under the circumstances presented, a U.S. court is bound to defer to those statements.” Id. at 189. “If deference by any measure is to mean anything,” the court said, “it must mean that a U.S. court not embark on a challenge to a foreign government’s official representation to the court regarding its laws or regulations, even if that representation is inconsistent with how those laws might be interpreted under the principles of our legal system.” Id. According deference to the “official statements” provided by MOFCOM, the court determined “that Chinese law required Defendants to engage in activities in China that constituted antitrust violations here in the United States.” Id. at 189-90.

The 2002 Notice that established the PVC system “does not specify how the ‘industry–wide negotiated’ price was set,” but the Second Circuit “defer[red] to the Ministry’s reasonable interpretation that the term means what it suggests—that members of the regulated industry were required to negotiate and agree upon a price.” Id. at 189. “It would be nonsensical to incorporate into a government policy the concept of an ‘industry–wide negotiated’ price and require vitamin C manufacturers to comply with that minimum price point if there were no directive to agree upon such a price.” Id. The court found it “reasonable to view the entire PVC regime as a decentralized means by which the Ministry, through the Chamber, regulated the export of vitamin C by deferring to the manufacturers and adopting their agreed upon price as the minimum export price.” Id. at 190. By thus “directing vitamin C manufacturers to coordinate export prices and quantities and adopting those standards into the regulatory regime, the Chinese Government required Defendants to violate the Sherman Act.” Id.

The court also rejected the district court’s focus on the role the manufacturers played in the establishment of the prices for vitamin C. “[T]he district court erroneously required Defendants to show that the government essentially forced Defendants to price–fix against their will in order to show that there was a true conflict between U.S. antitrust law and Chinese law.” Id. at 191-92. “This demands too much. It is enough that Chinese law actually mandated such action, regardless of whether Defendants benefited from, complied with, or orchestrated the mandate.” Id. at 192. The court accordingly declined “to analyze why China regulated vitamin C in the manner it did and instead focus[ed] on what Chinese law required.” Id.

The Second Circuit similarly refused to consider “whether the Chinese Government actually enforced the PVC regime as applied to vitamin C exports,” concluding that a focus on this question “confuses the question of what Chinese law required with whether the vitamin C regulations were enforced.” Id. Evidence of sales above the agreed price of $3.35/kg was also not relevant in the determination of whether a “true conflict” existed. “Even if Defendants’ specific conduct was not compelled by the 2002 Notice,” a true conflict was present “if compliance with the laws of both countries is impossible.” Id.

The court found the remaining comity factors to weigh “decidedly” in favor of comity-based dismissal. Id. at 193-94.

The plaintiffs petitioned for rehearing and rehearing en banc, and their petition was denied on November 4, 2016.

From the October 2016 E-Brief

Northern District of California Denies, In Part, Motions to Dismiss in “Liability Shift” Antitrust Litigation, Finding Plaintiffs Sufficiently Pleaded Conspiracy Allegations Against Credit Card Networks But Not As Against Issuing Banks

Geoffrey Holtz
Morgan, Lewis & Bockius LLP

The Northern District of California issued an interesting decision on September 30, 2016 that is instructive on the “plus factors” that a complaint must include to state a conspiracy claim under Section 1 of the Sherman Act.

In B & R Supermarkets v. Visa, Inc. et al., Case No. No. C 16-01150 WHA (N.D. Cal.), the plaintiffs — commercial merchants — filed suit against all of the major credit-card networks and most of the major banks alleging a conspiracy to shift liability for fraudulent charges to merchants who failed to upgrade their credit card machines to “EMV chip” technology.  Prior to October 2015, credit cards relied entirely on magnetic stripes, and card-issuing banks typically absorbed liability for fraudulent transactions, known as “chargebacks.”  In 2015, banks began to roll out credit cards in which an EMV chip was embedded to more efficiently guards against fraud.  Starting on October 1, 2015, if a customer presented an EMV chip card, but the merchant failed to use a certified EMV chip card reader to complete the transaction (and instead used the magstripe), the merchant became liable for any chargeback, instituting a so-called Liability Shift.  Each of the networks implemented the Liability Shift effective on the same day through changes to their network rules.

The plaintiffs sued under the Sherman Act and Cartwright Act on behalf of a putative class of merchants, claiming the defendants entered into an agreement to impose an important price term on all their merchant members by adopting the same policy shift in liability for fraudulent charges and making it effective on the same day to head off merchants from steering customers to use cards with more lenient terms.  The defendants moved to dismiss, arguing that their actions were permissible “parallel conduct” with no agreement to fix prices or foreclose competition. Judge William H. Alsup, District Court Judge for the Northern District of California, observed that an antitrust violation can be pled through circumstantial evidence in the form of “plus factors,” which help distinguish “permissible parallel conduct from impermissible conspiracy.”  “Plus factors” are “economic actions and outcomes that are largely inconsistent with unilateral conduct but largely consistent with explicitly coordinated action.”

As to the credit-card networks, the court determined the complaint sufficiently pled “plus factors” by pointing to statements those defendants made about a common practice, that the Liability Shift was carried out differently in the U.S. than an earlier rollout elsewhere, and the adoption of rules that prohibited merchants from “steering” a customer toward a card that might offer more favorable chargeback policies.  This was sufficient for a plausible inference of a conspiracy. 

As to the issuing banks, however, the court held that the complaint failed to plead sufficient “plus factors.”  Mere adoption of a network’s rules by an issuing bank does not amount to an impermissible conspiracy.  And even though the issuing banks benefitted from the Liability Shift, the pleaded facts “fail to nudge the allegations as to the issuing-bank defendants from possible to plausible.”  The decision provides a good roadmap of the “plus factors” analysis and the amount of evidence that suffices — or not — for an antitrust complaint to survive a motion to dismiss.

Northern District of California Considers Exceptions to the FTAIA for Price-Fixed Components of Finished Goods in Two Recent Decisions

Thomas M. Cramer
Jason M. Bussey
Karen Gift
Simpson Thacher & Bartlett LLP

On September 30, 2016, Judges Jon S. Tigar and James Donato, both of the Northern District of California, issued rulings in separate cases considering the extent to which the Foreign Trade Antitrust Improvements Act (“FTAIA”) applies to components of finished products manufactured outside of the United States but destined for sale in the United States.  15 U.S.C. § 6a.  In re Capacitors Litig., 2016 WL 5724960 (N.D. Cal. Sept. 30, 2016); In re: Cathode Ray Tube (CRT) Antitrust Litig., 2016 WL 5725008 (N.D. Cal. Sept. 30, 2016).  Taken together, the opinions provide guidance in two areas.  First, both courts treated price-fixed components of finished goods imported into the United States as “imports” excluded from the FTAIA.  Second, the opinions demonstrate that application of the “domestic effects” exception to the FTAIA continues to resist bright-line tests: courts will engage in a fact-specific analysis to determine whether the price-fixed components were a “substantial cost component of the finished product” sufficient to have a “direct effect” on U.S. commerce.

The FTAIA                                    

“Congress enacted the FTAIA in 1982 in respon[se] to concerns regarding the scope of the broad jurisdictional language in the Sherman Act.”  CRT, 2016 WL 5725008 at *2 (quoting United States v. Hui Hsiung, 778 F.3d 738, 751 (9th Cir. 2015) (citations and internal quotation marks omitted)).  The FTAIA was intended to remove from the purview of the Sherman Act anticompetitive trade or commerce that causes exclusively foreign injury.  Id.; In re Dynamic Random Access Memory (DRAM) Antitrust Litig., 546 F.3d 981, 985 (9th Cir. 2008). “Congress’s goal was to assure American companies that they would not be liable under the Sherman Act for conduct that typically would be considered anticompetitive so long as that conduct adversely affected foreign markets only.”  Capacitors, 2016 WL 5724960 at *1.  In effect, the FTAIA leaves to foreign authorities the task of addressing anticompetitive behavior that affects only foreign markets.
The FTAIA has two carve outs.  The statute does not apply to: (i) “import” trade and commerce and (ii) foreign, “nonimport” trade and commerce having a “direct, substantial, and reasonably foreseeable effect” on domestic trade.  Id. (quoting Hsiung, 778 F.3d at 754 and 15 U.S.C. § 6a).  Where a party seeks damages under the latter theory, they must also show that the domestic effect gave rise to the Sherman Act violation.  In the Ninth Circuit, the “import trade” basis for jurisdiction is theoretically straightforward.  Hsiung, 778 F.3d at 754-55 (“[N]ot much imagination is required to say that this phrase means precisely what it says.”).  It includes, “(1) transactions directly between a United States plaintiff purchaser and a defendant cartel and (2) transactions involving goods manufactured abroad and sold in the United States.”  CRT, 2016 WL 5725008 at *2.  Yet the analysis becomes trickier when a product is not directly imported into the United States, but is instead a component of another imported product.  Complex, too, is FTAIA’s second basis for jurisdiction, known as the “domestic effects” exception.

The Northern District of California Weighs in on the “Imports Exclusion” and Prong One of the “Domestic Effects” Exception

In Capacitors, both direct and indirect purchasers of capacitors, “a basic building block of electrical devices . . . present in virtually every electronic device in the world,” sued foreign manufacturers alleging a conspiracy to fix the price of the capacitors themselves and “suppress competition.”  2016 WL 5724960 at *1.  Given the complex procedural posture, Judge Donato divided summary judgment motions into two “phases.”  The court’s September 30th order addressed the first phase, dealing with “the parties’ disagreements about the scope of the import exclusion and proximate cause for the domestic effects exception to the FTAIA.”  Id. at *2. 
CRT involved an alleged decades-long, international conspiracy to fix the prices of cathode ray tubes (“CRTs”), “the primary component of old tube-style televisions and computer monitors.”  2016 WL 5725008 at *1.  Defendants moved for summary judgment on the ground that plaintiffs’ claims were “not actionable as a matter of law” under the Sherman Act due to the application of the FTAIA.  Id. at *1, *3.

In both cases, the court relied heavily on the Ninth Circuit’s 2015 decision in United States v. Hsiung, 778 F.3d 738 (9th Cir. 2015).  Hsiung, a criminal case brought by the U.S. Department of Justice,involved sales of foreign-manufactured TFT-LCD panels “incorporated into finished consumer products ultimately sold in the United States.”  Id. at 758.  In that case, the Ninth Circuit found that the sales at issue constituted import trade, but it did not resolve the “outer bounds of import trade” because “at least a portion of the transactions . . . involve[d] the heartland situation of the direct importation of foreign goods into the United States.”  Id. at 755 n.8.  The Ninth Circuit also noted that the sales were both “substantial and had a reasonably foreseeable impact on the United States,” resulting in a “sufficiently ‘direct’” impact on U.S. trade to satisfy the “domestic effects” exception.  Id. at 758-59.  Thus, Hsiung implied the Sherman Act may still apply to anticompetitive behavior related to components of finished products as either import trade or by satisfying the “domestic effects” exception.

In Capacitors, Judge Donato first considered whether three types of transactions constituted import commerce: those where standalone capacitors were (i) billed to entities in the U.S.; (ii) billed to foreign entities but shipped to the U.S.; and (iii) billed and shipped to a foreign entity.  2016 WL 5724960 at *3-5.  The parties agreed the FTAIA did not exclude the first category.  The Ninth Circuit in Hsiung had not resolved the second category, but the court found that those transactions also constituted import commerce, because the defendants “knew and intended that the goods would be delivered to the United States,” even if they sent the invoices abroad.  Id. at *4.  The court ultimately did not resolve the third category of claims, holding only that the FTAIA does not “state or support a per se rule excluding foreign purchasers just because they did their buying abroad,” but also recognizing that prior cases left only “a small opening for plaintiffs to establish proximate cause” for those transactions, which would be addressed during Phase II summary judgment motions.  Id. at *6.

Turning to transactions involving not standalone capacitors but rather finished products that incorporate capacitors as component parts, the court again relied on the Ninth Circuit’s decision in Hsiung, which “suggests, without definitively stating” that the transactions “may come within the Sherman Act as either import trade or under the domestic effects exception.”  Id. at *7.  Despite this guidance, Judge Donato found three principal distinguishing factors between Capacitors and HsiungId.

First, the analysis in Hsiung did not directly apply in Capacitors because, unlike TFT-LCDs, which made up between 30 and 80 percent of the cost of the finished products, “capacitors [were] tiny parts that cost pennies or less to buy, and are unlikely to be a substantial cost component of finished products even when used in volume.”  Id. (citing Hsiung, 778 F.3d at 758-59).  Second, unlike Capacitors, Hsiung was a criminal case; the government did not seek money damages, so it did not need to show that (and the Ninth Circuit never considered whether) the domestic effects of the conspiracy “gave rise” to the Sherman Act violation (the second prong of the “domestic effects” test).  Id.  Judge Donato concluded that the issue of whether capacitors manufactured abroad and incorporated abroad into finished products destined for sale in the United States satisfied either the “imports exclusion” or the “direct effects” exception raised unresolved issues of fact, and denied plaintiff’s motion for summary judgment.  Id. at *7.

In CRT, Judge Tigar reached more definitive holdings on both the “imports exclusion” and the “domestic effects” exception.  Plaintiffs argued that “purchases of CRT Products directly from Defendants (or their subsidiaries and affiliates), which had themselves imported the CRT Products into the United States,” constituted “‘import commerce’ that is not subject to the FTAIA.”  2016 WL 5725008 at *3.  Defendants responded by arguing that the purchases were not import commerce because the conspirators did not themselves “physically import the price-fixed good” and because the Plaintiffs “imported finished products containing price-fixed CRTs,” rather than the CRTs themselves.  Id. (emphasis in original). The court rejected both arguments.  First, the court held that “[i]t is sufficient that a conspiring defendant negotiated to set the price of a good that was imported into the United States, even if that good was sold by another conspirator or imported by someone else.”  Id. (citing Hsiung, 778 F.3d at 756).  Second, the court found it sufficient that the plaintiffs purchased CRT Products, especially “given that CRTs have no use other than as the primary component of a finished product.”  Id. at *4.

Judge Tigar ruled, in the alternative, that the plaintiffs could proceed under the “domestic effects” exception. Here, too the court looked to HsiungId. at *5.  Defendants’ central argument was that the effects of sales of CRTs incorporated into finished goods were not sufficiently “direct,” due to the complex nature of the distribution chains underlying finished consumer products.  Id. at *4.  Judge Tigar broke down Hsiung’s analysis of the directness requirement of prong one of the “domestic effects” exception into three factors:

(1) whether the price-fixed components were substantial cost components of the finished products, (2) whether conspiratorial meetings led to direct negotiations with United States companies (irrespective of whether the location of any meeting was in or out of the United States), and (3) whether it was understood that sales to foreign subsidiaries were destined for the United States. Id. at *5 (citing Hsiung, 778 F.3d at 758).  Viewing the evidence most favorably to the plaintiffs, the court found triable issues of fact for all three factors.  On the second and third factors, defendants held “hundreds of conspiratorial meetings taking place all over the world,” and were “well aware” that their price-fixing scheme would affect prices in the United States, the “world’s largest market for CRTs.”  Id.

Judge Tigar also found a triable issue of fact with respect to the first factor.  Id.  In contrast to Capacitors, the court considered CRTs to be a “substantial cost component” of finished goods, similar to the TFT-LCDs in HsiungId.  Further, unlike Hsiung, Judge Tigar went on to address the second prong of the “domestic effects” exception, finding a triable issue of fact as to whether defendants’ alleged price-fixing scheme “gave rise to” plaintiffs’ antitrust injury “by raising the prices of finished goods they purchased in the United States.”  Id.  The court thus rejected defendants’ motion for summary judgment, allowing plaintiffs’ Sherman Act claims to proceed.


Examining these two cases sheds light on how courts within the Ninth Circuit treat alleged conspiracies to fix prices of components of finished goods.  While Capacitors declined to address the issue, CRT found that importation of price-fixed goods as components of other goods satisfies the “imports exclusion” of the FTAIA for conspiracies to fix prices of the components. 

Second, both cases recognized thatprice-fixing of foreign-manufactured components of finished goods sold in the United States can result in Sherman Act violations.  But the analysis of whether such price-fixing results in sufficiently “direct effects” on U.S. trade to avoid application of the FTAIA may turn on whether such components are a “substantial cost component” of the finished products. 

As neither case reached a final ruling on the merits, it will be worthwhile to keep an eye on their ultimate dispositions to see if the court gives more detailed guidance on both issues.

Second Circuit Reverses Judgment Following Bench Trial, Concluding That American Express Did Not Violate Section 1 Of The Sherman Act By Entering Into Agreements That Prevent Merchants From Offering Discounts Or Incentives To Customers Who Use Credit Cards That Are Less Costly For Merchants To Accept

Aaron M. Sheanin
Pearson, Simon & Warshaw, LLP

On September 26, 2016, the U.S. Court of Appeals for the Second Circuit issued an opinion in United States v. American Express Company, Docket No. 15-1672, 2016 WL 5349734, ___ F.3d ___ (2d Cir. Sept. 26, 2016) (“AMEX”), reversing the district court’s judgment and permanent injunction against American Express Company and American Express Travel Related Services Company (collectively, “American Express or “Amex”).  The Department of Justice and seventeen States had sued American Express for violating Section 1 of the Sherman Act by entering into agreements with merchants containing nondiscriminatory provisions (“NDPs”).  Those NDPs prohibit merchants from offering discounts or non-monetary incentives to customers who use credit cards that are less expensive for merchants to accept.  The NDPs also preclude merchants from expressing preferences for any credit card or informing customers about the costs of different credit cards to merchants.  After a bench trial, the district court found in plaintiffs’ favor and permanently enjoined American Express from enforcing its NDPs.  On appeal, the Second Circuit reversed, finding error in the district court’s focus solely on the interests of merchants at the expense of the interests of cardholders.  The Second Circuit directed that judgment be entered in favor of American Express.

The credit-card industry operates as an interdependent, “two-sided market” in which both sides—cardholders and merchants—depend on widespread acceptance and use of a particular credit card by the other.  Price changes on either side of the market can result in demand changes on the other.  While merchants will decline to accept a credit card if the cost of doing so is too high, cardholders also will not use a credit card that is accepted by too few merchants.  Both sides of the market have different interests, with merchants generally seeking lower network fees and cardholders preferring better services, benefits, and rewards that are often funded by those fees.  Thus, successful credit-card networks must balance prices on both sides of the market.

American Express has the second largest market share among the four major credit-card networks in the United States.  Unlike Visa and MasterCard (which operate as “open-loop” systems in which the issuer, acquirer, and network functions are performed by different actors) American Express operates as a “closed-loop” system, in which it acts as the issuer (responsible for providing cards to, and collecting payments from, cardholders), the acquirer (responsible for merchant acquisition and accepting card transaction data from merchants for verification and processing), and the middleman network.  Through the closed-loop system, American Express directly sets the “interchange fee” paid by the acquirer to the issuer for handling transactions with the cardholder, the “merchant-discount fee” paid by the merchant to the acquirer for processing transactions, and the cardholder benefits.  American Express charges the same merchant-discount fee for all of its credit cards, regardless of the level of cardholder benefits associated with those cards. American Express’s model primarily depends on merchant-discount fees for revenue. The model benefits both merchants, by providing them with access to customers who tend to spend more per transaction and on an annual basis than users of other credit cards, and customers, by providing them with valuable benefits including a rewards program, customer service, fraud protection, and purchase and return protection. 

American Express’s merchant contracts contain NDPs which, as explained above, are designed to prevent merchants from steering their customers into using credit-cards or other forms of payment that are less expensive than more costly Amex cards.  The plaintiffs challenged these anti-steering NDPs as unreasonable restraints of trade.  After a seven-week bench trial, the district court agreed with the plaintiffs and permanently enjoined American Express from enforcing its NDPs for ten years.  The district court’s ruling rested on three critical findings. 

First, the relevant market was only the market for network services (e.g., acceptance of the cards by merchant, not for card issuance), despite the two-sided nature of the payment-card platform.  Second, American Express held sufficient market power in the market for network services to harm competition.  Third, the plaintiffs had proven that the NDPs caused actual anticompetitive effects on inter-brand competition in that they removed the competitive “reward” to networks offering merchants a reduced fee for credit-card acceptance services.

The Second Circuit reversed.  As an initial matter, the Court explained that the NDPs are vertical restraints between American Express and the merchants, rather than horizontal restraints between competing credit-card networks.  The Court noted that vertical restraints, which tend to be imposed by a product-creator on market intermediaries to induce them to promote a consumer’s use of a particular product, often have pro-competitive effects.  From this perspective, the Second Circuit then analyzed and rejected each of the district court’s key findings. 

Turning to relevant market, the Second Circuit held, “The District Court’s definition of the relevant market in this case is fatal to its conclusion that Amex violated § 1,” because it improperly excluded the second half of the two-sided market, the market for cardholders, from its market definition.  In undertaking its relevant market analysis, the district court had relied upon United States v. Visa USA, Inc., 344 F.3d 229 (2d Cir. 2003), which considered whether Visa’s and MasterCard’s exclusionary rules violated the Sherman Act.  Those exclusionary rules were horizontal restraints, which prohibited Visa’s and MasterCard’s member banks from issuing cards on the Amex or Discover networks.  The Visa court found the relevant market to be the market for payment-card network services in which the sellers were the payment card networks, and the buyers were the merchants and card issuers.  The horizontal restraints in Visa had separate anticompetitive effects on the market for network services and the market for cardholders obtaining general-purpose payment cards.  In contrast, the Second Circuit found that separately analyzing the effect of Amex’s NDPs on the market for network services from its effect on the market for general-purpose cards ignores the interdependence of the two markets and would penalize legitimate competitive activities in the market for general-purpose cards.

The Second Circuit explained that it defines a relevant market by applying a “hypothetical monopolist test” (“HMT”).  Under the HMT, “[a] market is any grouping of sales whose sellers, if unified by a hypothetical cartel or merger, could profitably raise prices significantly above the competitive level.  If the sales of other producers substantially constrain the price-increasing ability of the hypothetical cartel, these others are part of the market.” AMEX, 2016 WL 5349734, at *13 (quoting AD/SAT, Div. of Skylight Inc. v. Associated Press, 181 F.3d 216, 228 (2d Cir. 1999)). According to the Second Circuit, the district court failed to apply the HMT to define the relevant market and failed to use the HMT to quantify the change in cardholder behavior that would result from decreased merchant demand for use of the hypothetical monopolist’s network for credit-card transactions.  Specifically, the district court did not balance the hypothetical effects on cardholder behavior with those on merchant behavior.  Instead, it should have considered the extent to which merchant attrition due to increased merchant-discount fees might cause Amex cardholders to use alternative forms of payment.  In essence the district court erred in failing to define the relevant product market as encompassing both sides of the platform, because the market for payment-card network services necessarily affects the market for payment-card issuance.

Next, the Second Circuit rejected the findings below pertaining to market power.  The district court had concluded that American Express had sufficient market power to adversely affect competition, based on primarily on its Value Recapture (“VR”) initiatives (a series of fee increases to merchants over five years) and cardholder insistence (cardholders who would shop elsewhere or spend less if they were unable to use their Amex cards).  The Second Circuit found error in the district court’s failure to acknowledge that American Express’s fee increases to merchants were linked to its provision of additional benefits to cardholders which were necessary for the company to remain competitive.  Similarly, the cardholder insistence analysis was found erroneous.  As the Second Circuit explained, cardholder insistence does not result from Amex’s market power, but from providing competitive benefits to cardholders who then use their Amex cards, thereby increasing value to merchants who accept them.  Thus the Court held, “so long as Amex’s market share is derived from cardholder satisfaction, there is no reason to intervene and disturb the present functioning of the payment-card industry.”  As with the relevant market, the Second Circuit’s analysis of market power rested on the notion that the Amex network was a two-sided platform.

Finally, the Second Circuit rejected the district court’s findings that the NDPs had an actual adverse effect on competition.  Again, the district court had found harm to merchants, but did not weigh that harm against the benefits to cardholders in an analysis of the entire relevant market.  In fact, the evidence at trial had shown an increase in industry-wide transaction volume as well as substantial improvement in quality of card services, which suggested increased competition in the overall credit-card industry. 

From the September 2016 E-Brief

Ninth Circuit Holding on Common Carriers Exemption May Frustrate FTC’s Enforcement of Section 5 of the FTC Act

John Goheen
Elizabeth French
Simpson Thacher & Bartlett LLP

In Fed. Trade Comm'n v. AT & T Mobility LLC, No. 15-16585, 2016 WL 4501685 (9th Cir. Aug. 29, 2016), a panel of judges on the United States Court of Appeals for the Ninth Circuit held that AT&T is immune from liability under Section 5 the Federal Trade Commission (“FTC”) Act due to the “common carriers” exemption, reversing a district court’s contrary decision and rejecting the FTC and Federal Communications Commission’s (“FCC”) interpretation of that exemption.  Under the Ninth Circuit’s opinion, all activities undertaken by a common carrier are shielded from liability, regardless of whether those activities were undertaken in the entity’s capacity as a common carrier.  The FTC has the option to petition for a rehearing before the full Ninth Circuit or to seek review by the Supreme Court.

District Court Decision

In October 2014, the FTC sued AT&T, alleging that the company engaged in unfair practices by advertising its mobile data contracts as providing unlimited mobile data while failing to disclose that it may significantly slow the service of customers who used more than a set amount of data.  The FTC also alleged that AT&T’s conduct was deceptive because AT&T did not disclose, or failed to adequately disclose that it imposed data speed restrictions on unlimited mobile data plan customers who used more than a set amount of data in a given billing cycle.

AT&T moved to dismiss, claiming that it was immune from liability under Section 5 of the FTC  under an exemption applicable to “common carriers subject to the Acts to regulate commerce.” 15 U.S.C. § 45(a)(2).  The term “common carrier” is not defined in the FTC Act; instead, “Acts to regulate commerce” are defined as the Interstate Commerce Act of 1887, the Communications Act of 1934, and “all Acts amendatory thereof and supplementary thereto.”  15 U.S.C. § 44.  The parties did not dispute that AT&T was a “common carrier” with regard to some of its activities.  They also agreed that, at the time the FTC sued, AT&T’s provision of mobile data services was not among those activities.  AT&T nevertheless argued for a status-based interpretation of the exemption, arguing that, as a common carrier under the Communications Act, all of its conduct was immune from liability under Section 5.  In contrast, the FTC advocated for an activity-based approach according to which the exemption applied only to the extent AT&T undertook actions as a common carrier.

While AT&T’s motion to dismiss was pending, the FCC voted to reclassify broadband internet service from an information service (a non-common carrier service) to a telecommunications service (a common carrier service), which also reclassified mobile data service as a common carrier service.  The FCC’s vote, which split along party lines, was a response to the push for net neutrality rules to ensure that internet service providers did not throttle data, block content, or implement pay-for-play “fast lanes” to media companies.

In March 2015, Judge Edward M. Chen of the United States District Court for the Northern District of California denied AT&T’s motion to dismiss, finding that the understanding of the FTC Act at the time of its enactment supported an interpretation that the common carrier exemption applied only when an entity engaged in common carrier activities.  See Fed. Trade Comm’n v. AT & T Mobility LLC, 87 F. Supp. 3d 1087 (N.D. Cal. 2015) rev’d and remanded, No. 15-16585, 2016 WL 4501685 (9th Cir. Aug. 29, 2016).  Although AT&T argued that adopting the FTC’s interpretation would subject it to regulation by both the FTC and FCC, the district court found no conflict between the two sets of regulations.  Id. at 1094.  The district court also emphasized the potential for undesirable practical implications of a status-based exemption, including the possibility that such a rule would shield entities from Section 5 liability even if they engaged in de minimis common carrier activities.  Id.  Finally, the district court held that the FCC’s reclassification was only effective prospectively, and thus did not prevent the FTC from bringing suit for AT&T’s past conduct.  Id. at 1104.

Following the district court’s decision, the FTC and FCC cemented their agreement that the common carrier exemption was activity-based in a Memorandum of Understanding, which stated that both agencies held the belief that “the scope of the common carrier exemption in the FTC Act does not preclude the FTC from addressing non-common carrier activities engaged in by common carriers.”  FCC-FTC Consumer Protection Memorandum of Understanding at 2 (2015).

Circuit Court Decision

The Ninth Circuit unanimously reversed the district court’s order, holding that the FTC Act exemption for common carriers was status-based, thereby exempting all activities by such entities, including AT&T.  See Fed. Trade Comm'n v. AT & T Mobility LLC, No. 15-16585, 2016 WL 4501685 (9th Cir. Aug. 29, 2016).  The court found that the plain language of the FTC Act, read literally and consistently with the other exemptions in the statute, “casts the exemption in terms of status.”  Id. at *4. 

The court also found that a prior amendment to the FTC Act, which made another exemption clearly activity-based, demonstrated Congressional intent for the common carrier exemption to remain status-based.  Id. at *5.  Specifically, in 1958, Congress amended the packers and stockyards exemption, which had theretofore applied to “persons, partnerships or corporations subject to the Packers and Stockyards Act” such that it reached only “persons, partnerships, or corporations insofar as they are subject to the Packers and Stockyards Act.” Id. at *5-6.  The court found that the addition of “insofar as” for one exemption and not others was a clear indication that the remaining exemptions were to remain status-based, rejecting the FTC’s argument that the 1958 amendment was merely a clarification that the exemption was activities-based.  The Ninth Circuit ended its opinion by noting that although the FTC was entitled to Skidmore deference in its interpretation, such deference was unable to overcome the evidence that “point[ed] strongly” in favor of AT&T’s position.”  Id. at *8.

The FTC has long expressed concern that the common carrier exemption could be expanded to shield additional conduct from liability.  In 2007, the FTC’s own Broadband Connectivity Competition Policy predicted that “[a]s the telecommunications and Internet industries continue to converge, the common carrier exemption is likely to frustrate the FTC’s efforts to combat unfair or deceptive acts and practices and unfair methods of competition in these interconnected markets.”  Broadband Connectivity Competition, Policy Fed. Trade Comm’n at 41 (2007), available at http://www.  But the Ninth Circuit’s holding goes much further than broadband and the FCC’s reclassification of mobile data service to a common carrier service by exempting any common carrier activity from FTC Act liability, simply by virtue of the company’s status as a common carrier.  To date, the FTC has not confirmed whether the agency will appeal this limitation on its ability to pursue actions against common carriers who engage in non-common carrier conduct.

Judge Tigar Denies Most of the Defendants’ Summary Judgment Motions Based on Illinois Brick and Royal Printing in the CRT Antitrust Litigation

Qianwei Fu

On August 4, 2016, U.S. District Court Judge Jon S. Tigar issued an opinion denying most of the  summary judgment motions filed by the defendants against the direct action plaintiffs (“DAPs”) in In re: Cathode Ray Tube (CRT) Antitrust Litigation (MDL No. 1917) (Doc. 4742).  The case involves an alleged long-running conspiracy to fix the prices of cathode ray tubes (“CRTs”), a core component of tube-style screens used in televisions, computer monitors and other specialized applications.  In a comprehensive opinion, Judge Tigar analyzed three interrelated legal issues at the center of the common disputes in these motions: antitrust standing, the direct purchaser rule, and principal-agent relationships. 

Antitrust Standing

In AGC, the Supreme Court identified five factors to be considered when evaluating antitrust standing: (1) the causal connection between the antitrust violation and the harm to the plaintiff; (2) the nature of the injury; (3) the directness of the injury; (4) the potential for duplicative recovery; and (5) the existence of more direct victims.  Assoc. General Contractors of California v. California State Council of Carpenters, 459 U.S. 519, 537-44 (1983) (“AGC”).  Of the five AGC factors, the Court noted great weight should be given to the second factor – antitrust injury.  Antitrust injury generally requires the plaintiff to have suffered injury in the market in which competition is being restrained (the so-called “market participant requirement”).  A narrow exception exists where the plaintiff’s injury is “inextricably intertwined” with the injuries of market participants.  Op. 6-7.

The Direct Purchaser Rule

The issue is whether the DAPs’ claims fell within the exceptions to the so called “direct purchaser rule” of Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977) and Royal Printing Co. v. Kimberly Clark Corp., 621 F.2d 323 (9th Cir. 1980).

Under federal antitrust law, indirect purchasers do not have standing to sue for damages for price-fixing, whereas direct purchasers are permitted to sue for the entire (treble) amount of the anticompetitive overcharge (trebled).  This is referred to as the “direct purchaser rule.”  The rule generally bars the use of defensive and offensive pass-on theory.  Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481, 493 (1968); Illinois Brick, 431 U.S. at 730.  In his well-articulated opinion, Judge Tigar clarified the two main exceptions to the “direct purchaser rule,” namely, in situations where (1) because of a cost-plus contract or a control relationship, market forces have been superseded, and (2) a control relationship between a direct purchaser and a price-fixer forecloses any realistic possibility of suit by the direct purchaser.  Op. at 9. 

The court distinguished the “control exception” alluded to in a footnote in Illinois Brick from the control exception set out in Royal Printing.  As the court explained, the cost-plus contract exception and the control exception of Illinois Brick are illustrative of the same exception: where market forces have been superseded such that the entire overcharge is passed on to the indirect purchaser.  By contrast, under the Royal Printing exception, the control relationship between the price fixer and the direct purchaser forecloses a realistic possibility of suit by the direct purchaser.  In such a situation, an exception to the direct purchaser rule is necessary to promote private enforcement and an indirect purchaser has standing to sue for the entire amount of the overcharge.  Op. at 9, 13-14. 

Judge Tigar further analyzed several specific issues regarding the application of the Royal Printing exception.  First, the court stated that the Royal Printing exception is triggered “wherever either the price fixer or the direct purchaser can ‘exercise restraint or direction over, dominate, regulate, . . . command, . . . guide or manage’ the other such that a realistic possibility of suit by the direct purchaser is foreclosed.”  Op. at 17-19 (citing In re ATM Fee Antitrust Litig., 686 F.3d 741, 757 (9th Cir. 2012)).  Second, the “direction” of control is not dispositive.  The Royal Printing exception can apply when control operates upstream – i.e., when the direct purchaser owns/controls the upstream price fixer.  Op. 19-21.  Furthermore, the Court found that the timing of control is not dispositive.  Regardless of whether control exists during the conspiracy and/or at the time of suit, “the ultimate question remains whether the control relationship foreclosed a realistic possibility of suit.”  Op. at 21-23.

The Principal-Agent Relationship

The court also discussed the impact of principal-agent relationship on antitrust standing.  The Court pointed out that whether an individual or entity has standing to sue for damages based on a principal-agent relationship is distinct from whether he, she or it has standing as an indirect purchaser under the control exception from Illinois Brick (i.e., where control supersedes market forces).  A purchasing agent without a distinct economic identity in the distribution chain does not have standing to sue.  In this context, whether the principal owns or controls the purchasing agent is irrelevant.   The court reasoned that the agent does not suffer antitrust injury because it is merely selling purchasing services to the principal, and therefore is not a participant in the market for the price-fixed goods.   The court further stated that the other AGC factors also weigh against granting standing to a purchasing agent.  Op. at 23-25.

*        *        *

After setting forth the substantive legal standards, the Court turned to the defendants’ motions. 

Purchasing Agent MARTA Lacked Antitrust Standing

MARTA is a buying cooperative in the appliance and electronics industry.  It allegedly purchased CRTs from the price-fixers on behalf of its members.  Judge Tigar held that MARTA lacked standing because it functioned like an agent for its members without a distinct economic identity in the chain of distribution of CRTs.  The court noted several facts relating to MARTA’s purchasing behavior:  it had no discretion in negotiating the purchasing terms with CRT vendors; it never initiated CRT purchases and never purchased products; it did not maintain an inventory for resale; and its pricing structure resembled an agent that charges a commission for its service.  The court found that MARTA also lacked standing because it failed to satisfy the AGC factors.  Op. at 25-31.

The DAPs Who Purchased CRT Finished Products Had Antitrust Standing

Judge Tigar rejected the defendants’ argument that injuries suffered by purchasers of CRT finished products were not “inextricably intertwined” with the injuries of those who purchased price-fixed goods themselves (i.e., the finished product manufacturers).  The court found sufficient evidence submitted by the DAPs to satisfy the narrow exception to the market-participant-requirement of AGC.  Specifically, there was evidence to show that: (i) a CRT made up a substantial and identifiable portion of the cost of the finished product; (ii) a CRT is virtually valueless on its own; (iii) defendants monitored the retail price of CRT finished products and used that information to inform their CRT production and pricing decisions.   Op. at 31-33.

Application of Royal Printing Control Exception

Panasonic Defendants’ Motion

The Panasonic defendants contended that the DAPs purchased CRT finished products from Sanyo and thus their claims were barred by the direct purchaser rule.  The DAPs argued that the Royal Printing control exception applied because the direct purchaser – Sanyo – was controlled by Panasonic.  The court held that there was a genuine dispute of material fact as to whether Panasonic’s control of Sanyo foreclosed a realistic possibility of suit by Sanyo at the time the DAPs filed their claims.  The court ruled that the point at which to assess whether a realistic possibility of suit was foreclosed is the time at which the indirect purchasers filed suit.  Op. at 33-35.

SDI Defendants’ Motion

The alleged conspirator Samsung SDI (“SDI”) sold CRTs to Samsung Electronics Co. (“SEC”), which sold CRT finished products to the DAPs.  The defendants argued that the Royal Printing control exception did not apply because there was no actual control of SDI by SEC.  The court discussed in great detail the relationship between the two entities and the unique corporate structure of the Samsung Group – a South Korean chaebol.  Chaebols are closely knit business groups in South Korean “under the control of a single family or extended family, with key ‘flagship’ firms which are used as the instruments of control of other firms within the group.” 

The defendants argued that SEC only has a minority ownership (20%) of SDI and did not control SDI’s board or pricing decisions.  The court held that the  Royal Printing control exception requires a broader inquiry.  The court noted several undisputed facts presented by the DAPs:  SEC being the flagship of the Samsung Group with significant influence over SDI; SEC’s past actions for the benefit of SDI; the lack of independent outside directors at SEC and SDI; and both entities being part of the same chaebol.  Based on these facts, the court concluded there was a genuine dispute of material fact as to whether SEC controlled SDI within the meaning of the Royal Printing exception.  Op. 35-42.

Mitsubishi Defendants’ Motion

The DAPs purchased CRT finished products from NEC and a joint venture (“NMV”) between NEC and the alleged conspirator Mitsubishi.  The court held that the DAPs failed to present any evidence establishing a control relationship between Mitsubishi and NEC.  As to NMV, the court rejected the defendants’ argument that Mitsubishi must have sole control over the joint venture in order for the control exception to apply.  The court emphasized that the test is whether the amount of control is sufficient to foreclose a realistic possibility of suit by the direct purchaser.  Op. at 42-43.

LGE Defendants’ Motion

LGE argued that the DAPs’ damage claims for indirect purchases of CRT finished products from direct purchaser LGE on or after July 1, 2001 were barred.  LGE ceased manufacturing or selling CRTs when it sold its CRT business on July 1, 2001 to a joint venture (“LPD”) between LGE and Philips (also an alleged conspirator).   Therefore, after 2001, LPD was an alleged price fixer, LGE was a direct purchaser, and the DAPs were indirect purchasers.  LPD declared bankruptcy in 2006, before the DAPs filed the instant suit.   The court held that neither the direction of control nor the timing of control was dispositive.  As to LGE’s control of LPD, the fact that the supervisory board of LPD required a unanimous vote to take any action, was held sufficient to establish a genuine issue of material fact.  Op. 44-46.

From the August 2016 E-Brief

Seventh Circuit Affirms Certification of Containerboard Purchaser Class

Steven N. Williams
Cotchett, Pitre & McCarthy, LLP

On August 4, 2016, the United States Court of Appeals for the Seventh Circuit affirmed a district court decision certifying a nationwide class of purchasers of containerboard who alleged that producers and sellers of containerboard colluded to agree on prices, both directly and through mechanisms such as output restrictions.  Kleen Prods. LLC v. Int’l Paper Co., 2016 U.S. App. LEXIS 14282 (7th Circuit August 4, 2016). 

The direct purchaser class alleged that the defendants agreed to restrict the supply of containerboard by cutting capacity, slowing back production, taking downtime, idling plants, and tightly restricting inventory, and that these actions caused purchasers of containerboard to pay more for containerboard products than they would have in the absence of the illegal agreement.  The district court certified a class of direct purchasers from defendants or their subsidiaries or affiliates who purchased between February 15, 2004 and November 8, 2010. 

The Seventh Circuit reviewed the evidence presented by the plaintiffs in support of class certification, first noting that the district court was free to consider the views of plaintiffs’ experts because no challenge to them had been brought under Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579 (1993), citing Tyson Foods, Inc. v. Bouaphakeo, 136 S. Ct. 1036, 1049 for the principle that where there is no Daubert challenge, the district court may rely on expert evidence for class certification.  The Seventh Circuit also affirmed the district court’s decision not to hold an evidentiary hearing as part of the class certification process, ruling that this was a case-management decision the Court of Appeals had no reason to second guess.  2016 U.S. App. LEXIS 14282, * 7. 

Before analyzing the evidence, the Court of Appeals reiterated two points governing its review:  first, it noted that nothing in Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338 (2011) changed the deferential abuse of discretion standard applicable to review of a class certification decision, and second, it reiterated that “Rule 23 does not demand that every issue be common; classes are routinely certified under Rule 23(b)(3) where common questions exist and predominate, even though other individual issues will remain after the class phase.”  Id., citing McMahon v. LVNV Funding, 807 F.3d 872, 875-76 (7th Cir. 2015).

Turning to the evidence presented below, the Court focused on the predominance requirement of Rule 23(b)(3), as defendants had conceded typicality, commonality, and adequacy.  The Court reviewed basic facts about the containerboard industry.  Containerboard is a sheet of heavy paper with a smooth top and bottom, and a fluted layer between the two.  It is made in large, expensive mills, and the industry is dominated by vertically integrated producers.  Containerboard is a commodity, sold in standardized compositions and weights, with many prices set by price indices published in the periodical Pulp & Paper Week.  The Court set forth the market characteristics the parties had submitted to the district court, as well as the competing analyses each side’s experts had submitted. 

In analyzing the propriety of class certification, the Court of Appeals stated that “[p]redominance is satisfied when ‘common questions represent a significant aspect of a case and . . . can be resolved for all members of class in a single adjudication.”   2016 U.S. App. LEXIS 14282, * 13-14 (quoting Messner v. Northshore Univ. HealthSystem, 669 F.3d 802, 811 (7th Cir. 2012)).  The key issues before the district court were the alleged violation of the antitrust law, and the causal link between that violation and the class’ alleged injury.   The issue of damages was set to the side, as “it is well established that the presence of individualized questions regarding damages does not prevent certification under Rule 23(b)(3).”  Id. at * 14 (quoting Messner, 669 F.3d at 815).

On the liability issue, the Court ruled that the plaintiffs had made a sufficient showing that there was proof common to all class members that would show the existence of the conspiracy, and that it was not contested that this issue would be proved by evidence common to the class.  As to the fact of injury, the Court rejected defendants’ argument that at class certification the plaintiffs were required to show that every class member was impacted by the antitrust violation.   The Court repeated its prior statement that “[i]f the [district] court thought that no class can be certified until proof exists that every member has been harmed, it was wrong.”  Id. at 19-20 (quoting Suchanek v. Sturm Foods, Inc., 764 F.3d 750, 757 (7th Cir. 2014)).  Finding no need for the showing that defendants claimed was necessary, the Court concluded that the essential issue was whether the class could point to common proof that would establish antitrust injury on a classwide basis.  The class had done so, including through an expert analysis showing that the containerboard market was conducive to successful collusion because it was highly concentrated, vertically integrated, there were barriers to entry, there was little competition from foreign producers, there were no good substitutes for the product, there was low elasticity of demand, and the product was a standardized, commodity product.   Id. at * 21.

Defendants argued that plaintiffs’ market structure analysis was part of the “discredited structure-conduct-performance paradigm,” but the Court rejected this argument as the class had shown more than just market structure; specifically, price increases, a mechanism for price increases, communication channels used by the conspirators, and factors suggesting that cartel discipline could be maintained.  Id.  This evidence was sufficient to support class treatment of the merits.  Id.

Defendants’ next argument was that the class had conflated the market for containerboard (the material) with the market for finished products.  The district court had held that the uniform vertical integration in the market made it appropriate to look at finished products, and the Court of Appeals agreed, holding that “[p]urchasers (and we) have no reason to dig inside the defendant companies to evaluate their internal pricing of the raw materials they use in producing the boxes and other products they sell.”  Id. at 22.

The Court of Appeals rejected several other challenges to the class’ expert analysis, including the defendants’ argument that the class was engaging in a “trial-by-formula” method that was barred by Wal-Mart.  The Court ruled that the class was doing “nothing of the sort,” and that the class’ expert analysis was sufficient even for those class members who may have negotiated individually or had a longer term contract.  In those cases, the starting point for negotiations would be higher if the market price for the product was artificially inflated.  Id at 24.  The Court also rejected defendants’ arguments that the class was obligated to calculate individual damages rather than aggregate damages, as there is no need to “drill down and estimate each individual class member’s damages” at the class certification stage.  The allocation of individual damages can be managed individually at a later stage.  Id. at 26.  The Court stated that “[i]f in the end the Defendants win on the merits, this entire matter will be over in ‘one fell swoop’” while “[i]f Purchasers prevail on the common issues, both liability and aggregate damages will be resolved.”  Id. at 26 (quoting William Shakespeare, Macbeth, act 4, sc. 3 l. 220 (David Bevington ed., Pearson Longman 6th ed. 2009).

The Court of Appeals concluded that the class had demonstrated predominance and superiority of class action treatment, and ended its opinion by stating that “the fact that class certification decisions must be supported by evidence does not mean that certification is possible only for a party who can demonstrate that it will win on the merits.”

Class Certified in Delta Air/AirTran Baggage Antitrust Litigation

Elizabeth C. Pritzker

On July 12, 2016, U.S. District Court Judge Timothy Batten granted class certification status to consumers in a multidistrict antitrust action alleging that Delta Airlines and AirTran colluded to implement fees for passengers’ first checked bags.  The case, In Re Delta/AirTran Baggage Fee Antitrust Litigation, Case No. 1:09-md-2089-TCB, is pending in the Northern District of Georgia, Atlanta Division.   

The lawsuit stretches all the way to 2009 and the early days of checked bag fees.  Plaintiffs filed thirteen class-action complaints alleging that the Delta/AirTran first-bag fee was the product of a conspiracy between Delta and AirTran that violated Section 1 of the Sherman Act.  The cases were consolidated before Judge Batten by the Judicial Panel on Multidistrict Litigation.

Judge Batten’s memorandum opinion comprehensively goes through the parties’ evidence, expert opinions, Daubert challenges, and the requirements for class certification under FRCP 23.  The most contested components of the class certification inquiry addressed by Judge Batten include: the implied requirement of ascertainability; Rule 23(a)(4)’s adequacy requirement; and predominance under Rule 23(b)(3).  In Re Delta/AirTran Baggage Fee Antitrust Litigation, 2016 WL 3770957, at *7 (N.D. Ga. June 12, 2016).  

As a precis to addressing these Rule 23 elements, Judge Batten first considered arguments by the airlines that some passenger class members may have received “offsets” to their first bag charges in the form of alleged base-fare reductions.  According to defendants, the alleged price-fixing conspiracy potentially benefitted passengers to the extent any base-fare reduction received by passengers exceeded the amount of the first bag charge.  Judge Batten rejected the argument that the alleged offsets would relieve the airlines of antitrust liability for their alleged price-fixing conduct, on several grounds.  First, Judge Batten noted that courts repeatedly have refused to allow defendants accused of price-fixing to argue that their unlawful conduct in some way benefitted plaintiffs.  See 2016 WL 3770957, at *22-25, citing among other authorities, United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 226 n.59 (1940) (“Whatever economic justification particular price-fixing agreements may be thought to have, the law does not permit an inquiry to their reasonableness. They are all banned because of their actual or potential threat to the central nervous system of the economy.”); In re Nexium Antitrust Litig., 777 F.3d 9, 27 (1st Cir. 2015) (“[A]ntitrust injury occurs the moment the purchaser incurs an overcharge, whether or not that injury is later offset.”); In re K-Dur Antitrust Litig., No. 01-1652 (JAG), 2007 WL 5302308, at *12 (D.N.J. Jan. 2, 2007) (“[I]f the [plaintiffs] incurred an overcharge based upon the Defendant’s alleged actions, they would be deemed to have suffered an antitrust injury and would be entitled to recover the full amount of the overcharge, regardless of whether they may have benefitted in other ways from the Defendants’ alleged actions.”); and Valley Drug Co. v. Geneva Pharm., Inc., 250 F.3d 1181, 1193 (11th Cir. 2003) (even “those direct purchasers who potentially experienced a net benefit from defendants’ conduct [may] nevertheless bring[] suit against the defendants to recover their damages in the form of an overcharge.”).  Second, Judge Batten held, “[e]ven if base-fare reductions or other offsetting benefits were deemed relevant to the Plaintiffs’ claims…they would go at most to calculation of damages, not the fact of injury.”  2016 WL 3770957, at *28.  Third, Judge Batten found that the airlines’ attempt to rely on potential base-fare offsets as a means to defeat class certification and antitrust liability amounted to “little more than a back-door passing-on defense that is foreclosed by the Supreme Court’s decisions in Hanover Shoe and Illinois Brick Co. v. Illinois, 431, U.S. 720 (1977).”  Id., at *30.  “[A] defendant cannot defeat a finding that the plaintiff suffered antitrust injury and damages by showing that the plaintiff passed on the overcharge to another person or entity,” Judge Batten held.  Id., at *31.

The Court then turned to the most contested class certification elements.  Addressing the element of ascertainability first, Judge Batten considered Plaintiffs’ evidence that class members can be identified from information and records in the possession of the defendant airlines.  This evidence included accounting and passenger itinerary records that identify passenger names, dates of travel, and information about the amounts paid for the itinerary, including base fare, taxes, first-bag charges and other fees.  2016 WL 3770957, at *47-49.  In addition, Plaintiffs demonstrated that class members’ own records—such as receipts and bank or credit card statements—and self-identification affidavits could be used to further aid identification of class members in a feasible manner.  Id., at *49-50.  These identification methods, Judge Batten held, satisfied Rule 23’s requirement that there be an administratively feasible way to identify class members using objective criteria.  Id., *51.

Defendants reiterated their benefit offset argument with respect to the Rule 23(a) element of adequacy of representation, asserting that “Plaintiffs cannot adequately represent a class that consists of net winners and losers.”  2016 WL 3770957, at *59.  The Court rejected the argument that any offsetting benefit to class members (such as a base-fare reduction) created a fundamental conflict among class members.  In doing so, Judge Batten considered and distinguished two Eleventh Circuit opinions, Pickett v. Iowa Beef Processors, 209 F.3d 1276, 1280 (11th Cir. 2000) and Valley Drug, supra, 350 F.3d at 1193-94, concluding that to defeat an adequacy showing, defendants must demonstrate that the benefits allegedly received by plaintiffs were so significant and apparent that class members receiving them effectively had no incentive to see the challenged practice(s) declared unlawful.  “For example, in Pickett, 209 F.3d at 1280, a class of cattle producers alleged that certain types of contracts for purchasing cattle violated the federal antitrust laws, but the class ‘include[d] producers who willingly entered into’ the very contracts that were at issue.  Under such circumstances, ‘the plaintiffs could not possibly provide adequate representation’ to the whole class.”  Id., at *60-61 (internal citations omitted).  “Similarly, in Valley Drug, the class was represented by two regional pharmaceutical wholesalers, while the three national wholesalers with the bulk of the antitrust claims had allegedly experienced a net gain from the conduct at issue and had chosen not to bring a suit on their own, suggesting a sharp misalignment of economic interests between the regional and national wholesalers.”  Id., at *61.  Judge Batten ruled “[t]he facts of Valley Drug and Pickett stand in contrast to those of this case because there the conflict was substantial enough to suggest ‘divergent interests and objectives’ among class members.”  Id., at *61-62.  “That is not the case where, as here, any base-fee reductions were de minimis and at best incidental to the antitrust overcharge to which Plaintiffs claim they were subjected.”  Id., at *62.  “This conflict, if one existed, is not so fundamental that it would prevent Plaintiffs from vigorously prosecuting the interests of the class through qualified counsel,” the Court held.  Id, at *63.

Judge Batten also found that the Rule 23(b) element of predominance was satisfied.  The Court concluded that Plaintiffs had met their burden to show that evidence pertaining to the alleged price-fixing conspiracy was common, in that it “will inevitably focus on Defendants’ conduct and communications and will not vary among class members….”  2016 WL 3770957, at *66.  Rejecting Delta’s argument that the imposition of the first-bag fee did not have the same effect on all proposed class members, such as those who paid less in first-bag fees than they received in base-fare reductions, the Court reiterated that it “has already rejected Defendants’ offset and reimbursement arguments, which are insufficient to defeat a finding of predominance as to antitrust impact and damages.”  Id., at *69-70.  “Antitrust actions involving allegations of price-fixing have frequently [been] held to predominate in the class certification analysis,” Judge Batten noted.  Id., at 72 (internal citation omitted). “Here, the analysis and evaluation of Plaintiffs’ proof that Defendants conspired to impose the first-bag fee and that the resulting antitrust violation impacted the class ‘will be done once for the benefit of the class and not repeatedly for each individual member.’” Id.  While individualized proof “relevant with respect to the calculation of damages” likely will be present, “the fact that there will necessarily be individualized damages evidence does not preclude Rule 23 certification,” Judge Batten held.  Id., at * 73 (citation omitted). 
Judge Batten’s opinion also is notable for its review of several seminal class certification decisions that were issued during the lengthy period in which briefing was underway on the class certification and related Daubert motions in the Delta/AirTran Baggage Fee Antitrust Litigation, including the Supreme Court decisions in Dukes, Comcast, Amgen and Tyson Foods, the Eleventh Circuit opinions in Electrolux and Carriuolo v. Gen. Motors Co., and numerous decisions by district courts on class certification issues.   

FTC Takes LABMD To Task For Inadequate Computer Security Practices in Violation of Section 5(n)

Scott Lyon

In a unanimous opinion, the Federal Trade Commission ruled that an Administrative Law Judge erred when he concluded that the FTC failed to prove that LabMD, a Georgia-based clinical testing laboratory, had engaged in an “unfair or deceptive trade practice” based on inadequate computer security for records containing protected health information (PHI) and sensitive personally identifiable information (PII).  In re LabMD (Opinion of Commission), FTC No. 9357 (F.T.C. July 29, 2016).  The FTC’s Opinion, written by Chairwoman Edith Ramirez, concluded that the wrong legal standard for unfairness had been applied and that “LabMD’s security practices were unreasonable, lacking even basic precautions to protect the sensitive consumer information maintained on its computer system.”  Id., *1. According to the FTC, LabMD’s failures included, but were not limited to: 1) failing to use an intrusion detection system or file integrity monitoring; 2) neglecting to monitor firewall traffic; 3) failing to provide data security training to its employees; and 4) failing to delete any of the 750,000 patient records it had collected between 2008 and 2014, including records culled from its physician-clients’ databases despite never having performed testing for those patients. Id.   The Opinion also clarified the FTC’s position on when an inadequate security program is “likely to cause substantial injury to consumers” sufficient to invoke its jurisdiction.  Id.  Ultimately, the message for businesses was clear: the FTC has jurisdiction pre-emptively to investigate and prosecute inadequate computer security, regardless of whether a breach has occurred.

The History

In February 2008, a security firm named Tiversa discovered that a LabMD billing computer on the Gnutella peer-to-peer file-sharing network was inadvertently sharing an insurance aging report containing PHI and sensitive PII on approximately 9,300 patients, including their names, dates of birth, Social Security numbers, CPT codes for laboratory tests conducted, and in some cases, health insurance company names, addresses, and policy numbers.  Id., *2.  This file was referred to in the matter as the “1718 File” because it was 1,718 pages long.  Id., *3.  After locating the 1718 File, the Tiversa researcher used the “browse host” function to reveal 950 other shared files in the “My Documents” directory on the LabMD computer, most of which consisted of music and video files.  Id.  However, eighteen documents were also being shared at the same time, three of which also contained patient PHI.  Id.

Tiversa disclosed its download of the 1718 File to LabMD and offered its remediation services, which LabMD ultimately rejected.  Id., *4.  Instead, LabMD proceeded to conduct an internal investigation without disclosing the breach to its affected patients.  Id.  The FTC’s Opinion cites to LabMD’s engagement of an independent security firm to conduct penetration testing and vulnerability mapping on its network. Id.  The security firm’s report identified a number of urgent and critical vulnerabilities on four of LabMD’s seven servers and rated the overall security of each server as “poor.” Id.  Meanwhile, a Civil Investigative Demand (CID) served on Tiversa’s affiliate, The Privacy Institute, resulted in the production of a spreadsheet of companies Tiversa claimed had exposed the personal information of 100 or more individuals, including LabMD, and a copy of the 1718 File. Id., *32.  This led the FTC to open an investigation of LabMD, which resulted in an action against it for failing to implement reasonable security, an alleged “unfair” practice. 

The Proceeding

In November 2015, Administrative Law Judge D. Michael Chappell dismissed the FTC’s claims following an administrative trial, concluding that the FTC failed to prove that LabMD’s security practices were “likely to cause substantial consumer injury.” Id., *7.  Complaint counsel presented substantial expert testimony on the potential injuries that could result from a theft of PHI, including not only identity theft and fraud, but also misdiagnosis and drug interactions caused by a merger of the patient’s actual medical records with the records of the identity thief. Id., *6-7. Rather than consider the threats posed by the practices at the time of the disclosure, the Initial Decision remarked that “the absence of any evidence that any consumer has suffered harm as a result of [LabMD]’s alleged unreasonable data security, even after the passage of many years, undermines the persuasiveness of [the FTC]’s claim that such harm is nevertheless ‘likely’ to occur.”  In re LabMD (Initial Decision), FTC No. 9357, *55 (F.T.C. November 13, 2015).  Adopting a post-hoc analysis, the Initial Decision concluded that because actual harm had not been demonstrated, the allegedly unreasonable security practices were not “likely” to cause substantial consumer harm.  Id., *55-56.  The Initial Decision also held that “privacy harms, allegedly arising from an unauthorized exposure of sensitive medical information … unaccompanied by any tangible injury such as monetary harm or health and safety risks, [do] not constitute ‘substantial injury’ within the meaning of Section 5(n).”  Id., *88.  Claiming that the “substantial consumer injury” required by Section 5(n) could not be satisfied by “hypothetical” or “theoretical” harm or “where the claim is predicated on expert opinion that essentially only theorizes how consumer harm could occur,” Judge Chappell opined that “[f]airness dictates that reality must trump speculation based on mere opinion.”  Id., *67.

The FTC’s opinion rejected not only Judge Chappell’s analysis, but also his overly narrow view of what constitutes “harm” in the case of a security breach.  According to the FTC, “[w]e conclude that the disclosure of sensitive health or medical information causes additional harms that are neither economic nor physical in nature but are nonetheless real and substantial and thus cognizable under Section 5(n).”  In re LabMD (Opinion of Commission), *17.  The Commission pointed out that its very first data security case was brought against the pharmaceutical company Eli Lilly, where lax security practices resulted in the inadvertent disclosure of the e-mail addresses of Prozac users. Id., *18.   The opinion also identified “established public policies” in both state and federal law protecting sensitive health and medical information from public disclosure, as well as the recognition of privacy harms in tort law that do not require either economic or physical harm. Id., *18-19.

More importantly, the FTC ruled that a showing of “significant risk” of injury is sufficient to satisfy the “likely to cause” standard set forth in the Act.  According to Chairwoman Ramirez, Judge Chappell’s post-hoc analysis focusing on the injuries suffered by patients (whom were never notified of the breach) “comes perilously close to reading the term ‘likely’ out of the statute.  When evaluating a practice, we judge the likelihood that the practice will cause harm at the time the practice occurred, not on the basis of actual future outcomes.  This is particularly true in the data security context.  Consumers typically have no way of finding out that their personal information has been part of a data breach.”  Id., * 23.  The FTC also re-emphasized that it is authorized to act pre-emptively in order to prevent harm, explaining that “Section 5 very clearly has a ‘prophylactic purpose’ and authorizes the Commission to take ‘preemptive action.’  We need not wait for consumers to suffer known harm at the hands of identity thieves.” Id.  (citations omitted).

In addition to concluding that LabMD’s inadequate security practices were likely to cause substantial harm to the 750,000 patients in its databases, the Commission also concluded that consumers had no reasonable ability to avoid the resulting harm. Id., *25-26.  It noted that most patients were wholly unaware that their records were being collected by LabMD, which obtained them directly from its physician-clients, including records for which no testing was ever performed. Id., *26.  LabMD attempted to counter that consumers could mitigate any injury “after the fact,” but the Commission disagreed. Id.  According to the Opinion, “[o]ur inquiry centers on whether consumers can avoid harm before it occurs … even assuming arguendo that the ability to mitigate harm does factor into its avoidability, there is nothing LabMD has pointed to that demonstrates mitigation after the fact would have been possible here.  Without notice of a breach, consumers can do little to mitigate its harms.” Id. (emphasis in original).  The Commission also pointed out that “it may be difficult or impossible to mitigate or avoid further harm, since [consumers] have ‘little, if … any, control over who may access that information’ in the future, and tools such as credit monitoring and fraud alerts cannot foreclose the possibility of future identity theft over a long period of time.”  Id.
As to the third factor of its analysis (whether countervailing benefits to consumers or to competition outweigh the cost of implementing adequate practices), the FTC pointed to the ubiquity of “free or low cost software tools and hardware devices available for detecting vulnerabilities, including antivirus programs, firewalls, vulnerability scanning tools, intrusion detection devices, penetration testing programs, and file integrity monitoring tools,” as well as free or low-cost availability of IT security training courses and free notifications available from vendors, the Computer Emergency Response Team (CERT), the Open Source Vulnerability Data Base, and the National Institute of Science and Technology. Id., *27.  From an operational security standpoint, the FTC concluded that LabMD could have easily implemented access controls based on the “principle of least privilege,” limiting employees’ access to the types of data necessary to perform their particular job functions and preventing employees from installing software such as the LimeWire application without administrative privileges. Id.  LabMD could also have purged data for consumers for whom it had never performed testing, as there was no legal obligation for it to retain these data. *27-28.

The FTC’s Final Order required LabMD “to establish, implement, and maintain a comprehensive information security program that is reasonably designed to protect the security and confidentiality of consumers’ personal information” for the next twenty years, with biennial assessments and reporting.  The Opinion recognized that while LabMD has ceased operations for the time being, it continues to exist as a corporation and still maintains records on approximately 750,000 consumers. Id., *36.  Accordingly, the required information security program need only be appropriate “for the nature and scope of LabMD’s activities.”  “[A] reasonable and appropriate information security program for LabMD’s current operations with a computer that is shut down and not connected to the Internet will undoubtedly differ from an appropriate comprehensive information security program if LabMD resumes more active operations.”  Id. The Final Order also required LabMD to notify all “individuals whose personal information LabMD has reason to believe was or could have been exposed about the unauthorized disclosure of their personal information” and “notify the health insurance companies for these individuals of the information disclosure.” Id., *35. LabMD has sixty days after service of the Opinion and Final Order to file a petition for review.

The Takeaway

The FTC’s authority to regulate the adequacy of computer security practices continues to solidify.  The Third Circuit held in 2015 in Wyndham Worldwide Corp. that the FTC can challenge deficient security practices without first issuing regulations advising businesses how to comply with its expectations. Id. at 255.   In the reversal of Judge Chappell’s Initial Decision in the LabMD case, the FTC made it clear that its authority would not be confined by an Article III-based standing analysis requiring proof of actual injury after the fact.  This pre-emptive investigative and prosecutorial authority could be further tested in cases in which whistleblowers report allegedly lax security practices that have not resulted in a public data breach. 
For businesses eager to demonstrate their compliance with FTC expectations, the Commission’s LabMD Opinion points to the large body of freely-available consent decrees and prior decisions outlining practices to be avoided, as well as free resources allowing businesses to improve their processes and procedures for little or no cost.  When all appeals have been exhausted, the LabMD experience will likely serve as a cautionary tale for others – if it had put a fraction of the effort expended defending itself into preventative improvement of its security processes, it might still be in business today.

From the July 2016 E-Brief

Second Circuit Throws Out $7.25 Billion Visa, MasterCard Settlement

Joyce M. Chang
Cotchett, Pitre & McCarthy, LLP

On June 30, 2016, a three-judge panel of the United States Court of Appeals for the Second Circuit unanimously reversed a district court order approving a $7.25 billion antitrust settlement between Visa Inc. and MasterCard Inc. and millions of retailers. In re Payment Card Interchange Fee & Merch. Disc. Antitrust Litig., 2016 U.S. App. LEXIS 12047 (2d Cir. June 30, 2016)(“Payment Card Litigation”). The Court held that some of the class plaintiffs were inadequately represented in violation of Rule 23(a)(4) and the Due Process Clause. The Court’s ruling upended more than a decade of efforts to resolve litigation between the card industry and merchants.

The class action lawsuit, brought on behalf of approximately 12 million merchants nationwide, alleges a conspiracy in violation of Section 1 of the Sherman Act. After nearly ten years of litigation, the parties agreed to a settlement (“Settlement Agreement”) that released all claims in exchange for disparate relief to each of two classes: up to $7.25 billion would be paid to an opt-out class, and a non-opt class would be granted injunctive relief. Payment Card Litigation at *5-6. The district court certified these two settlement-only classes, and approved the settlement as fair and reasonable. Id. at *6. However, numerous objectors and opt-out plaintiffs argued that the class action was improperly certified and that the settlement was unreasonable and inadequate. Id. The Second Circuit Court of Appeals agreed, and vacated the district court’s certification of the class action and reversed the approval of the settlement. Id.

In short, when a Visa or MasterCard credit card transaction is approved, the merchant receives the purchase price minus two fees: the “interchange fee” that the issuing bank charged the acquiring bank and the “merchant discount fee” that the acquiring bank charged the merchant. Id. at *7. Plaintiffs alleged that “the Visa and MasterCard network rules allowed the issuing banks to impose an artificially inflated interchange fee that merchants have little choice but to accept.” Id. at *9. Substantial litigation between the filing of the first consolidated complaint in 2006 through the present resulted in a Settlement Agreement that was approved in December 2013. Id. at *10-11.

The Settlement Agreement divided the plaintiffs into two classes. The first class, the Rule 23(b)(3) class, covered merchants that accepted Visa and/or MasterCard from January 1, 2004 to November 28, 2012. The second class, the Rule 23(b)(2) class, covered merchants that accepted or will accept Visa and/or MasterCard from and after November 28, 2012. Id. at *11. Appellants, including those who opted out from the (b)(3) class and objected to the (b)(2) class, “argue[d] that the (b)(2) class was improperly certified and that the settlement was inadequate and unreasonable” because there was a clear conflict between merchants of the (b)(3) class, which pursued solely monetary relief, and merchants in the (b)(2) class, merchants who sought only injunctive relief. Id. at 15, 22. Specifically, the “former would want to maximize cash compensation for past harm, and the latter would want to maximize restraints on network rules to prevent harm in the future,” creating a clear conflict of interest. Id. at 22. Moreover, “[u]nitary representation of separate classes that claim distinct, competing and conflicting relief creates unacceptable incentives for counsel to trade benefits to one class for benefits to the other in order somehow to reach a settlement.” Id. at 24. The problems associated with unitary representation were exacerbated because members of the worse-off (b)(2) class could not opt-out. Therefore, the Court held, binding the disadvantaged class members – the (b)(2) class – to the Settlement Agreement violated Rule 23(a)(4) and the Due Process Clause.

The rejection of this deal raises the prospect that it will have to be renegotiated, or the case tried, resulting in further litigation that could take many more years to resolve.

Court of Appeal Jump Starts In re Automobile Antitrust Cases I and II

Lee F. Berger
Paul Hastings LLP

The California Court of Appeal has revived a thirteen year-old state court class action antitrust litigation (a rarity since the Class Action Fairness Act was enacted in 2004) involving an alleged conspiracy by automobile manufacturers and their Canadian subsidiaries.  In re Automobile Antitrust Cases I and II, Case No. A134913 (Cal. Ct. App., 1st Dist., July 5, 2016).  The Court of Appeal reversed a trial court’s grant of summary judgment to defendant Ford Motor Company of Canada, Ltd. (“Ford Canada”), but affirmed summary judgment as to defendant Ford Motor Company (“Ford U.S.”).  A comparison between the Court of Appeal’s holdings regarding the two Ford entities shows a useful delineation of what is required for plaintiffs to survive summary judgment in a Cartwright Act case.  Invitations to meet with competitors, information exchange with competitors, internal corporate discussions of potential actions, and economic motive to conspire are all insufficient.  Plaintiffs must present additional direct or substantive evidence of agreement and action taken in response to agreement.  The Court of Appeal concluded that the plaintiffs were able to make the required showing for Ford Canada, but not as to Ford U.S.

Plaintiff California car purchasers allege that defendant automobile manufacturers, distributors, and trade associations conspired from 2001 to 2003 to prevent the export of vehicles sold in Canada to the United States.  Car makers traditionally sold vehicles to dealers in Canada at a different price than the same vehicle sold in the United States.  Given a favorable exchange rate at the time (which made Canadian cars relatively less expensive for U.S. purchasers) and the similarity of vehicles sold in the two countries, arbitrage opportunities existed, and exporters purchased new vehicles in Canada and sold them in the United States for less than dealers in the United States could sell.  The car makers had individual anti-export policies in place before 2001, but the plaintiffs alleged that the defendants conspired to maintain and step-up these polices in light of the increased exports.

While most major automobile manufacturers and two trade associations were named as defendants, all but the U.S. and Canadian Ford companies were either dismissed, settled, or went bankrupt.  The trial court certified the class, and then granted summary judgment in favor of both Ford U.S. and Ford Canada. The Court of Appeal first decided a key evidentiary issue regarding the admissibility of certain deposition testimony that the parties reached “some consensus” at a trade association meeting.  The plaintiffs offered the deposition testimony of Toyota Canada’s general counsel, Pierre Millette, who testified about attending a trade association meeting among defendants, stating “I can remember comments being made that everyone supported the concept of trying to keep the vehicles in Canada,” and that keeping cars in Canada “was simply a concept that there was some consensus on from everyone at the meeting.”  The trial court agreed with Ford that this testimony should be excluded, but the Court of Appeal reversed.

Ford first argued that Millette’s statements were inadmissible hearsay, on the basis that Millette’s testimony described out-of-court statements of agreement made by other meeting participants.  But the Court of Appeal found that the testimony does not report the statements of others, but instead only Millette’s “general[] impressions and conclusions based on his participation in the meeting.”  Second, the Court of Appeal considered whether Millette’s conclusion that there was general support for keeping vehicles out of Canada was impermissible opinion evidence from a lay witness.  The Court of Appeal found that the testimony was admissible lay opinion because it was based on the witness’s personal knowledge and observations, and because Millette could not recall more specific detail about the meeting and therefore “he was testifying at the ‘lowest possible level of abstraction.’”

The Court of Appeal then considered whether the trial court’s entry of summary judgment in favor of Ford U.S. and Ford Canada was proper.  To answer that question, citing the California Supreme Court’s decision in Aguilar v. Atlantic Richfield Co., the Court of Appeal considered whether a jury could find that “it is more likely than not – on the evidence presented – that [the Ford entities] entered into an illegal agreement with any other alleged co-conspirator.” 

On this basis, the Court of Appeal agreed with the trial court’s entry of summary judgment as to Ford U.S.  Specifically, the Court found that communications between Ford U.S. and its subsidiary Ford Canada regarding potential steps to combat cross-border sales did not support finding an illegal agreement under the rule of Copperweld v. Independence Tube, 467 U.S. 752 (1984) in which the United States Supreme Court held that a corporation and its wholly owned subsidiary must be viewed as a single enterprise, and thus incapable of conspiring with each other. 

The Court of Appeal further found that while evidence showed that Ford U.S. had the motive to stop cross-border sales, a jury could not infer that Ford U.S. had engaged in a conspiracy with its competitors based on motive alone.  Nor is evidence of information-gathering about competitors’ actions to prevent cross-border sales, or an internal email regarding a proposal to contact other car makers about the same, sufficient to show participation in a conspiracy.  In the Court of Appeal’s view, there was no evidence from which a reasonable jury could infer that it was more likely than not that Ford U.S. joined a conspiracy.

But the Court of Appeal reached a different outcome as to Ford Canada, finding that plaintiffs had proffered sufficient evidence that a jury could find that Ford Canada had violated the Cartwright Act.  The Court of Appeal started by disregarding Ford’s evidence that the defendants had maintained anti-export policies for decades before the alleged conspiracy, on the basis that an agreement among competitors to maintain otherwise lawful polices can constitute a violation of the Cartwright Act, especially when changing industry conditions could create a motive to collude to maintain those policies.

The Court of Appeal then considered the evidence, giving special weight to Millette’s testimony regarding supposed consensus among the industry participants, in conjunction with evidence of:  meetings and communications among defendants with the alleged goal of finding an industry-wide solution to the cross-border sales problem; Ford Canada’s and other defendants’ stepped-up anti-export efforts; information sharing among Canadian auto distributors; and defendants’ economic motive to conspire.  Taken as a whole, the Court of Appeal concluded that a reasonable jury could find that Ford Canada participated in an unlawful conspiracy. 

Notably, much of the evidence that the Court of Appeal considered as contributing to a denial of summary judgment as to Ford Canada was found insufficient as to Ford U.S. – motive to conspire, information sharing, and communications regarding potential meetings.  But the Court of Appeal explained that when considering the evidence against Ford Canada as a whole, inclusion of that evidence in addition to more direct evidence of meetings and putative consensus is sufficient to deliver the case to the jury.

Antitrust Claim Predicated on Fraud on the FDA May Survive Motion To Dismiss

Jonathan Mincer
Lindsey Bohl
Simpson Thacher & Bartlett LLP

On June 16, 2016, a federal magistrate judge recommended denying defendants’ motion to dismiss in a case presenting a number of interesting issues, including issues of first impression, at the intersection of antitrust law, fraud on the FDA, and the Hatch-Waxman Act’s 180-day exclusivity period granted to “first-filers” for FDA approval of generic versions of approved drugs. Meijer, Inc. v. Ranbaxy Inc., No. 15-11828 (D. Mass. Jun. 16, 2016) (unpublished) (“Meijer”). These issues included (1) whether the Food Drug and Cosmetic Act (“FDCA”) precludes antitrust claims predicated on fraud on the FDA; (2) whether a firm can have monopoly power without any sales or profits in the market; and (3) whether the FDA’s regulatory activity can be an intervening factor preventing a finding of proximate cause.

In Meijer, a putative class of direct purchasers alleged that drug manufacturer Ranbaxy violated Section 2 of the Sherman Act by submitting fraudulent applications to the FDA for two generic drugs in order to obtain the statutory 180-day exclusivity period and deter other potential generic drug manufacturers from entering the market. Id. at 8. These fraudulent applications allegedly delayed the FDA’s final approval of Ranbaxy’s drugs for years, as the FDA investigated and eventually entered into a consent decree with Ranbaxy. Id. at 10-11. Meanwhile, Ranbaxy maintained exclusivity for generic drugs including Diovan and Valcyte, delaying Ranbaxy’s and generic competitors’ entry into the market and thereby requiring class members to pay higher prices for drugs they needed.

  1. FDCA Preclusion

    The first issue the magistrate judge addressed was one “of apparent first impression: whether Sherman Act claims brought by purchasers of a product may be predicated on an underlying fraud on the [FDA].” Id. at 1. The magistrate judge found that such claims could survive, relying on a Supreme Court decision finding that the FDCA did not preclude a private action under a different federal statute, the Lanham Act. POM Wonderful LLC v. Coca-Cola Co., 134 S. Ct. 2228 (2014). In POM Wonderful, the Court held that there was no express preclusion, as neither statute spoke to the issue. Id. at 2237. The Court also found no implied preclusion, as the statutes complemented each other: the FDCA protected public health and safety generally, while the Lanham Act enabled competitors to protect their commercial interests against unfair competition. Id. at 2238. Similarly, the magistrate judge here found no preclusion, as the FDCA does not expressly preclude Sherman Act claims and the FDA’s authority under the FDCA did not extend to policing anticompetitive behavior. Meijer at 24.

    For one drug at issue, generic Diovan, the magistrate judge had to address another issue of first impression: whether plaintiffs’ claim of fraud could survive even though the FDA had not found fraud during its investigation of Ranbaxy’s conduct.  The Second Circuit has held that a finding of fraud by the FDA is unnecessary when such a finding is only an element of a claim—as opposed to the entire claim—and the claim arises from state law, rather than from an attempt to remedy fraud on the FDA. Desiano v. Warner-Lambert & Co., 467 F.3d 85, 94-95 (2d Cir. 2006). The magistrate judge applied Desiano to find that plaintiffs’ claims could survive because they arose from antitrust law, rather than from the FDCA, and were not an attempt to remedy fraud itself. Meijer at 41.

  2. Monopoly Power With No Sales or Profits

    The magistrate judge also considered whether Ranbaxy could have monopoly power under Section 2 of the Sherman Act when its “product never actually reached the market and earned no profits.” Meijer at 33. The Supreme Court has stated that proof of actual anticompetitive effects can obviate the need to establish market power, explaining that market power is “but a surrogate for detrimental effects.” FTC v. Ind. Fed’n of Dentists, 476 U.S. 447, 461 (1986). In Meijer, the magistrate judge found, there was a highly regulated market in which Ranbaxy’s first-filer status gave it the power to exclude competitors; in this context, plaintiffs’ allegations that Ranbaxy’s conduct created “actual detrimental effects on the market and financial harm to consumers” were sufficient to plead monopoly power. Meijer at 34.

  3. Proximate Cause

    To prevail on their antitrust claims, plaintiffs were also required to show a proximate cause linking the harms suffered with defendants’ actions. See Associated Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters, 459 U.S. 519, 535 (1983). The injury claimed in Ranbaxy—paying higher prices for generic drugs—was “precisely the type of grievance contemplated by Sherman Act § 2,” but it was “less clear” if plaintiffs would have suffered this harm even absent defendants’ alleged conduct. Meijer at 35-36.

    Plaintiffs acknowledged that it was unknown whether a competitor was ready to enter the market during the damages period and whether the FDA would have approved such a competitor’s entry. Id. at 36. But the magistrate judge noted that the proximate cause requirement is satisfied when the injury is a foreseeable and natural result of the defendant’s conduct; here, the magistrate judge found, the delay in entry by competitors was a natural and foreseeable consequence of Ranbaxy’s conduct. Id. at 36-37.

    Additionally, the magistrate judge found that the FTC’s regulatory activity—specifically, its delay in reviewing Ranbaxy’s applications—was not an intervening factor that would prevent a finding of proximate cause. Id. at 36. The magistrate judge explained that although the FDA made an independent judgment to grant Ranbaxy’s application, its decision-making was impacted by Ranbaxy’s misrepresentations. Id. The magistrate judge relied on In re Neurontin Marketing and Sales Practices Litigation (“Neurontin II”), in which the First Circuit held that when Pfizer marketed a drug to doctors, the doctors exercising their medical judgment was not a superseding intervening factor breaking the chain of causation because Pfizer’s scheme relied on the expectation that the doctors would base their prescribing decisions in part on Pfizer’s fraudulent marketing. 712 F.3d 21, 38-39 (1st Cir. 2013). The magistrate judge found Neurontin persuasive and found that the FDA’s actions did not break the chain of causation here either. Meijer at 16.

  4. Conclusion

    Ranbaxy raises a number of issues of first impression, all of which the magistrate judge recommended resolving in favor of plaintiffs.  If these recommendations are adopted by the district court, Ranbaxy may give rise to a new set of antitrust claims that, like the reverse payment cases, arise from the Hatch-Waxman Act’s 180-day exclusivity period.  

From the June 2016 E-Brief

Ninth Circuit Affirms Personal Liability of Former President of Online Marketer Under Section 5 of FTC Act; Remands for Determination of Joint and Several Liability

Courtney A. Palko
Blecher, Collis & Pepperman

In 2009, the FTC sued Commerce Planet and three of its top officers, including its former president Charles Gugliuzza, under Section 5 of the FTC Act, seeking a permanent injunction and restitution for Commerce Planet’s deceptive and unfair business practices arising from its online marketing of a website-hosting service called “OnlineSupplier.” (Fed. Trade Comm’n v. Commerce Planet, Inc., 815 F.3d 593, 596–97 (9th Cir. 2016); see Compl., Fed. Trade Comm’n v. Commerce Planet, Inc., No. 09-1324 (C.D. Cal. Nov. 10, 2009).

OnlineSupplier was marketed as enabling consumers to make money by selling products online. (Commerce Planet, 815 F.3d at 597.) When consumers signed up for a free “Online Auction Start Kit,” consumers received a 14-day free trial of OnlineSupplier, after which Commerce Planet automatically charged a recurring monthly membership fee to the credit cards of those consumers who failed to affirmatively cancel during the initial trial period. This billing practice is a “negative option.” Many consumers did not realize that they had agreed to buy OnlineSupplier and only learned so when the charge appeared on their credit card. Membership fees ranged from $29.95 to $59.95 per month.

Commerce Planet and two individual defendants immediately settled. Gugliuzza proceeded to trial. (Id. at 597; see Final Judgment against Defendants Aaron Gravitz, Commerce Planet, Inc., and Michael Hill, Fed. Trade Comm’n v. Commerce Planet, Inc., No. 09-1324 (C.D. Cal. Nov. 18, 2009).) Following a 16-day bench trial in 2012, the district court entered an order finding that Commerce Planet had violated the FTC Act, holding Gugliuzza personally liable for Commerce Planet’s unlawful conduct, enjoining Gugliuzza from engaging in similar misconduct, and ordering him to pay $18.2 million in restitution. (Fed. Trade Comm’n v. Commerce Planet, Inc., 878 F. Supp. 2d 1048, 1093 (C.D. Cal. 2012) (Carney, J.) Gugliuzza appealed, challenging the validity of the restitution award, as well as the district court’s liability determination. (Fed. Trade Comm’n v. Commerce Planet, Inc., 815 F.3d 593, 597 (9th Cir. 2016).) Erwin Chemerinsky argued on behalf of Gugliuzza. zIn separate opinions (one published and the other unpublished), the Ninth Circuit (Callahan, Watford, Owens, JJ.) affirmed in part, vacated in part, and remanded. (Fed. Trade Comm’n v. Commerce Planet, Inc., 815 F.3d 593, 605 (9th Cir. 2016); Fed. Trade Comm’n v. Commerce Planet, Inc., No. 12-57064, --- F. App’x ---, 2016 WL 828326, at *1–2 (9th Cir. Mar. 3, 2016).

I. In Federal Trade Commission v. Commerce Planet, Inc., 815 F.3d 593 (9th Cir. 2016) (Watford, J.), the Ninth Circuit affirmed the validity and amount of the restitution award. Because joint and several liability is permissible, the award need not be limited to the unjust gains each defendant personally received. Nevertheless, the panel vacated the judgment and remanded because the district court judgment against Gugliuzza did not specify that Gugliuzza was jointly and severally liable for Commerce Planet’s restitution obligations. On remand, the district court is to reinstate the $18.2 million restitution award if it holds Gugliuzza jointly and severally liable; otherwise, the award is to be limited to the unjust gains Gugliuzza personally received.

A. First, the panel held that the district court had authority to award restitution under Section 13(b) of the FTC Act. Section 13(b) provides that the FTC “may seek, and after proper proof, the court may issue, a permanent injunction.” (15 U.S.C. § 53(b); see Commerce Planet, 815 F.3d at 598.) Applying Porter v. Warner Holding Co., 328 U.S. 395, 397–98 (1946) and Federal Trade Commission v. Pantron I Corp., 33 F.3d 1088, 1102 (9th Cir. 1994), the Ninth Circuit invoked the scope of the court’s broad inherent equitable powers and held that the FTC Act’s permanent injunction provision authorizes district courts to order payment of restitution in addition to injunctive relief. (Commerce Planet, 815 F.3d at 598–99.)

The Ninth Circuit rejected Gugliuzza’s argument that a separate provision, Section 19(b) of the FTC Act, 15 U.S.C. § 57b(b), eliminates a court’s power to award restitution. Section 19(b) provides that a court may award “the refund of money or return of property [and] the payment of damages” in actions brought to enforce the FTC’s cease-and-desist orders. Remedies in Section 19 “are in addition to, and not in lieu of, any other remedy . . . .” Porter rejected a similar argument.

The Ninth Circuit further held that restitution is not limited to the unjust gains that Gugliuzza personally received. An individual may be held personally liable for restitution of the corporation’s unjust gains provided the requirements for imposing joint and several liability are satisfied. For an individual to be held personally liable for corporate violations of the FTC Act, the FTC must prove that the individual: (1) participated directly in, or had the authority to control, the unlawful acts or practices at issue; and (2) had actual knowledge of the misrepresentations involved, was recklessly indifferent to the truth or falsity of the misrepresentations, or was aware of a high probability of fraud and intentionally avoided learning the truth.

Applying the two-pronged test, the district properly found those requirements were satisfied, and the Ninth Circuit concluded that those findings were adequately supported by the record. Nothing beyond satisfaction of the two-pronged test for personal liability is required to establish joint and several liability for a corporation’s restitution obligations. Accordingly, “[d]efendants held jointly and severally liable for payment of restitution are liable for the unjust gains the defendants collectively received, even if that amount exceeds (as it usually will) what any one defendant pocketed from the unlawful scheme.”

Nor was the Ninth Circuit persuaded by Gugliuzza’s argument that if the district court was authorized to award what amounts to “legal” restitution, then Gugliuzza’s Seventh Amendment right to a jury trial was invoked. Although the Ninth Circuit conceded the Supreme Court may need to reconsider the issue, it held: “For now at least, so long as a court limits an award under § 13(b) to restitutionary relief, the remedy is an equitable one for Seventh Amendment purposes and thus confers no right to a jury trial.”

However, the panel noted that the judgment entered did not hold Gugliuzza jointly and severally liable for Commerce Planet’s restitution obligations. Although the FTC argued that it was a mere oversight, which the Ninth Circuit viewed as plausible under the circumstances, the Ninth Circuit lacked authority to correct any mistake. Therefore, the panel vacated the judgment and remanded to the district court to determine whether to (1) hold Gugliuzza jointly and severally liable with Commerce Planet and thus personally liable for $18.2 million in restitution, or (2) limit the restitution to the unjust gains Gugliuzza personally received. Either way, Gugliuzza is entitled to offset the $522,000 the FTC collected from his settling co-defendants.

B. Second, the panel held that the district court did not abuse its discretion in calculating $18.2 million in restitution. Following the direction of its sister circuits, the Ninth Circuit adopted a two-step burden-shifting framework for calculating the amount of a restitution award under Section 13(b) for a violation of the FTC Act: (1) the FTC bears the burden of proving that the amount it seeks in restitution reasonably approximates defendant’s unjust gains; and (2) the burden then shifts to the defendant to show that the FTC’s figures overstate that amount. Unjust gains are measured by a defendant’s net revenues (i.e., amount consumers paid minus refunds), and any risk of uncertainty at the second step “‘fall[s] on the wrongdoer whose illegal conduct created the uncertainty.’”

The Ninth Circuit concluded that the FTC satisfied its burden by presenting undisputed evidence that Commerce Planet received $36.4 million in net revenues from sales of OnlineSupplier during the relevant time period. Because Commerce Planet made material misrepresentations (failure to adequately disclose the negative option) that were widely disseminated, the FTC was entitled to a presumption that all consumers relied on those misrepresentations.

Gugliuzza failed to present any reliable evidence that the $36.4 million overstated Commerce Planet’s unjust gains. The district court properly refused to consider the expert testimony of Dr. Kenneth Deal, who opined that “not many” of Commerce Planet’s consumers were deceived based on a consumer survey that he did not conduct and which was not shown to have been “‘conducted according to accepted principles.’”

The Ninth Circuit concluded that it was not arbitrary for the district court, in reliance on the FTC’s expert’s testimony that “most” consumers were deceived, to cut the permissible $36.4 million award in half and reduce it to $18.2 million. The district court did not abuse its discretion in conservatively slashing the award to Gugliuzza’s benefit.

II. In a separate unpublished memorandum opinion, Federal Trade Commission v. Commerce Planet, Inc., No. 12-57064, --- F. App’x ---, 2016 WL 828326 (9th Cir. Mar. 3, 2016), the panel rejected Gugliuzza’s challenges as to liability.

Specifically, the panel found that the district court did not err in finding that Commerce Planet violated the FTC Act by engaging in deceptive and unfair practices in marketing OnlineSupplier. The panel rejected Gugliuzza’s contention that Commerce Planet’s conduct was consistent with industry practice, and relying on Federal Trade Commission v. Cement Institute, 333 U.S. 683, 688, 720–21 (1948), held that, in any event, a practice that is standard to a particular industry can still violate the FTC Act. The district court did not abuse its discretion in excluding the testimony of Gugliuzza’s proposed expert to demonstrate a low rate of consumer confusion. Moreover, actual deception is not required; the FTC Act requires only that a practice is likely to deceive, and the district court did not clearly error in finding that consumers were likely to be deceived.

Second, the panel found that the district court did not clearly err in finding Gugliuzza personally liable for Commerce Planet’s violations of the FTC Act. At a minimum, Gugliuzza was recklessly indifferent to the truth or falsity of the misrepresentations, as he discussed customer complaints and “quickly jettisoned” improvements because they “were a disaster” to sales.

Finally, the panel concluded that the advice of counsel defense did not shield Gugliuzza from liability. Advice of counsel is not a valid defense as to knowledge required for individual liability, and even if it were, the district court did not clearly err in finding that Gugliuzza had “‘acted as Commerce Planet’s de facto legal counsel.’”

Accordingly, the district court’s liability determination was affirmed.

Second Circuit Reinstates Antitrust Claims Against Defendant Banks for Manipulating Libor

Joyce M. Chang
Cotchett, Pitre & McCarthy, LLP

On May 23, 2016,  the Second Circuit Court of Appeals in Gelboim v. Bank of Am. Corp., 2016 U.S. App. LEXIS 9366 (2nd Cir. May 23, 2016) reversed a 2013 ruling dismissing Appellants’ antitrust claims against sixteen of the world’s largest banks (“the Banks”).  Appellants, comprised of various individuals and entities that held diverse financial instruments with the Defendant Banks, alleged that the Banks colluded to depress the London Interbank Offered Rate (“LIBOR”) by violating the rate-setting rules, and that the rate of return associated with the various financial instruments pegged to LIBOR was therefore lowered as a result of the Banks’ manipulation.

The District Court  had dismissed the litigation in its entirety on the ground that Appellants failed to demonstrate anticompetitive harm. In re LIBOR-Based Financial Instruments Antitrust Litigation, 935 F. Supp. 2d 666 (2013).The Second Circuit reversed because “(1) horizontal price-fixing constitutes a per se antitrust violation; (2) a plaintiff alleging a per se antitrust violation need not separately plead harm to competition; and (3) a consumer who pays a higher price on account of horizontal price-fixing suffers antitrust injury.” Gelboim at *4.

LIBOR, often referred to as the “most important number in the world,” underpins hundreds of trillions of dollars of transactions, and is used as a component or benchmark in a countless number of business dealings. Id. at *3. A LIBOR increase of merely one percent would have allegedly cost the Banks hundreds of millions of dollars. Id.  at *6. Furthermore, as the Banks were still reeling during the relevant time period from the 2007 financial crisis, a high LIBOR rate could potentially signal deteriorating finances to both the public and to regulators. Id.

To that end, Appellants alleged that “the Banks corrupted the LIBOR-setting process and exerted downward pressure on LIBOR to increase profits in individual financial transactions and to project financial health.” Id. at *7. Appellants alleged that the Banks did so by engaging in a horizontal price-fixing conspiracy whereby each participant submitted an artificially low cost of borrowing in order to suppress LIBOR. Id. at *8. Appellants relied on evidence gathered by United States Department of Justice (“DOJ”) investigations, as well as statistics compiled by the DOJ that indicated a conspiracy amongst the Banks beginning in 2007. Id.

In reviewing the grant of a motion of dismiss de novo, the Court of Appeals examined both the existence of an antitrust violation and an antitrust injury in this case – noting that while it ordinarily would not do so, the distinction between the two issues are easily blurred. Id. at *18. Indeed, the Court of Appeals wrote that the lower court’s decision confused the interplay between these two concepts. Id.

First, in order to avoid dismissal, Appellants “had to allege an antitrust violation stemming from the Banks’ transgression of Section One of the Sherman Act.” Id. The Court of Appeals held that Appellants had indeed plausibly alleged an antitrust violation attributable to the Banks because “LIBOR forms a component of the return from various LIBOR-denominated financial instruments, and the fixing of a component of price violates the antitrust laws.” Id. at *20.

Second, the Court of Appeals also found that the Appellants had plausibly alleged antitrust injury – one of two components of antitrust standing – because “[t]hey have identified an ‘illegal anticompetitive practice’ (horizontal price-fixing), have claimed an actual injury placing appellants in a ‘’worse position’ as a consequence’ of the Banks’ conduct, and have demonstrated that their injury is one the antitrust laws were designed to prevent.” Id. at *29 – 30, citing Gatt Communs., Inc. v. PMC Assocs., L.L.C., 711 F.3d 68, 76 (2nd Cir. 2013). The Court of Appeals rejected the lower court’s ruling that since the LIBOR-setting process was a “cooperative endeavor” there could be no anticompetitive harm because “[t]he machinery employed by a combination for price-fixing is immaterial.” Id. at *30. Equally unsound was the lower court’s dismissal on the ground that Appellants failed to plead harm to competition because a “plaintiff need not ‘prove an actual lessening of competition in order to recover.’” Id. at *31 – 32, citing Blue Shield of Va. v. McCready, 457 U.S. 465, 482 (1982). Indeed, “[i]f proof of harm to competition is not a prerequisite for recovery, it follows that allegations pleading harm to competition are not required to withstand a motion to dismiss when the conduct challenged is a per se violation” (emphasis in original). Id. at 32. Although the district court deemed it significant that Appellants could have suffered the same harm under normal circumstances of free competition, the Court of Appeals reasoned that “antitrust law relies on the probability of harm when evaluating per se violations.” Id. at 33- 35, citing Catalano, 446 U.S. at 649 (“[T]he fact that a practice may turn out to be harmless in a particular set of circumstances will not prevent its being declared unlawful per se.”).

The next question bearing on antitrust standing is whether Appellants satisfied the efficient enforcer factors. Id. at *37. The efficient enforcer factors “reflect a concern about whether the putative plaintiff is a property party to perform the office of a private attorney general and thereby vindicate the public interest in antitrust enforcement.” (internal quotations omitted). Id. at *44. Since the District Court did not reach this second component of antitrust standing – a finding that appellants are efficient enforcers of the antitrust laws – the Court of Appeals remanded this issue for the District Court to consider in the first instance.

In the alternative, the Banks had urged affirmance on the ground that appellants did not adequately allege conspiracy, but the Court of Appeals held that “[s]kepticism of a conspiracy’s existence is insufficient to warrant dismissal; ‘a well-pleaded complaint may proceed even if it strikes a savvy judge that actual proof of these facts is improbable, and that a recovery is very remote and unlikely.’” Id. at *46. In any event, the Court of Appeals found that “appellants’ complaints contain numerous allegations that clear[ed] the bar of plausibility” and therefore, rejected this alternative basis offered by the Banks. Id. at *44 – 46.

This appellate decision sets precedent in the Second Circuit that financial benchmarks constitute a price element under U.S. federal antitrust law – even if Defendants were engaged in a joint process, as the Defendant Banks were in this case. The critical allegation is that “the Banks circumvented the LIBOR-setting rules, and that joint process thus turned into collusion.” Id. at *30 – 31.

Antitrust and Consumer Protection Claims Upheld in Indirect Purchaser Titanium Dioxide Price-Fixing Case

Steven N. Williams
Cotchett, Pitre & McCarthy, LLP

In Harrison v. E.I. Dupont De Nemours & Co., 2016 U.S. Dist. LEXIS 77465, N.D. Cal. case no. 13-cv-1180 (June 13, 2016), the Hon. Beth Labson Freeman denied defendants’ motion to dismiss the indirect purchasers third amended class action complaint. 

Plaintiffs alleged that defendants conspired to fix the prices of titanium dioxide sold in the United States.   Titanium dioxide is an ingredient used in many products including paint.   Plaintiffs, purchasers of “architectural paint,” alleged claims under federal and state antitrust laws, state consumer protection laws, and common law.  Plaintiffs claimed that defendants conspired to fix the prices of titanium dioxide, and that they were injured by paying artificially inflated prices for architectural paint of which titanium dioxide was an ingredient.  Defendants moved to dismiss the third amended complaint (“TAC”) under Fed. R. Civ. Proc. 12(b)(1) and under Fed. R. Civ. Proc. 12(b)(6).  2016 U.S. Dist. LEXIS, * 3-5.

Defendants’ 12(b)(1) motion was based on their argument that the district court lacked subject matter jurisdiction because the plaintiffs did not have standing.  Defendants argued that plaintiffs could not adequately plead that their injury was fairly traceable to the challenged conduct of the defendants, an argument that the district court had accepted in dismissing the plaintiffs’ second amended complaint (“SAC”).  In their (“SAC”), plaintiffs alleged that defendants fixed the price of titanium dioxide, that manufacturers of architectural coatings (a broad product category which includes architectural paint) paint paid higher prices as a result, and that those artificially inflated prices were then passed on to plaintiffs and the class.  The district court held this insufficient to demonstrate standing because architectural coatings is a broad product category with great variety in the amount of titanium dioxide used in different products.  In their SAC, plaintiffs had provided details only about a single product within the category of architectural coatings.  The district court rejected this approach as the SAC would have swept up many products into the proposed class for which no allegations had been set forth.  In its prior order, the district court also noted its concerns with the plaintiffs’ attempt to include two different levels in the chain of distribution within their class – a merchant class and a consumer class – whose claims would be adverse to each other.  Id., * 7-9.

In denying the 12(b)(1) motion, the district court held that these issues were resolved in the TAC, which alleged a single consumer class for purchases of architectural paint only, and which identified particular architectural paint products and, in some cases, the amount of titanium dioxide in the paint products. In addition, plaintiffs provided allegations that titanium dioxide comprised a substantial part of the total cost of architectural paint and that manufacturers of architectural point cannot absorb component cost price increases, but must instead pass these price increases on at rate of almost 100%.  The district court rejected defendants’ arguments that these allegations were incorrect, ruling that such arguments were appropriate for class certification or summary judgment but not for a motion to dismiss.   Id., * 9-12.

Turning to the 12(b)(6) motion, defendants’ arguments were largely based on the assertion that plaintiffs had failed to satisfy the prudential standing test of Associated General Contractors of California, Inc. v. California State Council of Carpenters (“AGC”), 459 U.S. 519 (1983).  In its prior motion to dismiss orders, the district court had held that AGC applied to the plaintiffs’ state law claims and that the plaintiffs had not met that standard.  The district court held that the plaintiffs in the TAC had cured the prior deficiencies by, inter alia, narrowing the product market to architectural paint and by adding specific allegations linking that market to the titanium dioxide market, including allegations that titanium dioxide represents a significant part of the total cost of architectural paint and that artificial cost increases for titanium dioxide result in price increases for architectural paint.  Further, the risk of duplicative recovery was eliminated by plaintiffs’ decision to only allege a class of consumers and not to pursue claims on behalf of merchants.  Id., * 15-18.

The district court rejected the argument that the AGC factors called for dismissal because of the alleged difficulty of calculating damages in indirect purchaser cases due to the need to trace overcharges through the chain of distribution.  The district court noted that such concerns are present in every indirect purchaser case, and that potential difficulties in calculating and apportioning damages are not a reason to bar state law indirect purchaser claims.  Id. * 19.

Finally, the district court dismissed claims brought under New York’s General Business Law § 349 on the ground that the statute requires pleading of a “deceptive” act, and that plaintiffs’ claims of price-fixing did not constitute a deceptive act.  The district court held that deceptive statements made to cover up other illicit conduct was not sufficient to satisfy this requirement. Id. at * 23-24.

From the April 2016 E-Brief

Tyson Foods v. Bouaphakeo: The Supreme Court Maintains Current Standards for Statistical Evidence in Class Actions

Lee F. Berger
Kristin S. Starr
Paul Hastings LLP

On March 22, 2016, the U.S. Supreme Court affirmed certification of a class under the Fair Labor Standards Act (“FLSA”), ruling that statistical sampling and other forms of “representative evidence” may be used to satisfy the predominance requirement for class certification under Federal Rule of Civil Procedure 23.  Tyson Foods, Inc. v. Bouaphakeo et al., No. 14-1146, 577 U.S. ___ (March 22, 2016).  Instead of promulgating a broad rule, the Court held that whether such evidence is admissible depends on case-specific factors, particularly emphasizing whether the proffered representative evidence would have been admissible in a case brought by an individual plaintiff. 

Plaintiffs in Tyson Foods were employees in the kill, cut, and re-trim departments at Tyson Foods’ pork processing plant.  Before and after working on the floor, Tyson required these employees to “don and doff” protective equipment.  Tyson allegedly failed to pay employees fully for this donning and doffing time.  If the amount of time the employees spent donning and doffing protective equipment, when added to employees’ time working on the floor, exceeded 40 hours, then Tyson would have violated the FLSA by not paying overtime rates for the excess time.  Tyson never kept records regarding the amount of “donning and doffing” time for its employees because it treated the time as uncompensated, though it would have been required to track that time if it was compensable.

The employees sued Tyson, claiming that Tyson denied them overtime pay for the uncompensated donning and doffing time under the FLSA and state law.  The district court certified the class under Fed. R. Civ. P. 23 and allowed for “collective action” treatment under 29 U.S.C. § 216. 

At class certification, Tyson argued that plaintiffs failed to meet the Rule 23(b)(3) predominance requirement because the question of whether any individual class member worked over 40 hours a week including donning and doffing time – that is, whether there was injury-in-fact – predominated over any other common questions.  In the absence of individual records, Plaintiffs sought to satisfy the question of injury-in-fact by using a statistical study, based on hundreds of videotaped examples of employees donning and doffing protective equipment, to arrive at an average donning and doffing time, and then added that average amount to the class member’s recorded floor time to determine the total hours worked.  Tyson argued that, because donning and doffing time varied for each individual employee based on department and role, using a statistical average was unfair and presumed the answer to the predominance question.  The district court certified the class, including reliance on the statistical average to satisfy the predominance requirement.

The jury awarded $2.9 million in unpaid wages to the class, and Tyson appealed.  The question on appeal was whether plaintiffs could use statistical evidence to satisfy Rule 23(b)(3)’s predominance requirement regarding injury-in-fact.

The Supreme Court’s 6-2 decision affirmed the use of statistical evidence to satisfy the predominance requirement.  First, because Tyson did not maintain time records regarding donning and doffing, plaintiffs were left without alternatives to representative evidence to establish total time worked.  Second, the employees in the class were sufficiently similar—they did similar jobs in the same facility—that an average estimate of donning and doffing time was reasonable.  Third, Tyson never challenged plaintiffs’ statistical studies under Daubert nor did Tyson introduce its own statistical studies.  Fourth, the Court pointed to the action being a FLSA case and precedent allowing the use of representative evidence to prove liability in FLSA cases.  See Anderson v. Mt. Clemens Pottery Co., 328 U.S. 680, 686–88 (1946). 

One aspect of the Court’s analysis is likely to have long-lasting effects.  It reasoned that a court would permit an individual plaintiff to use statistical average evidence to show his donning and doffing time had the employee brought an individual action.  If an individual could use such evidence to prove individual injury-in-fact, then so too could he use it to show injury-in-fact as to all class members.  On this basis, the Court distinguished Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338 (2011), another FLSA case in which the court disapproved of “trial by formula.”  In Wal-Mart, the Tyson Foods Court reasoned, the proffered statistical evidence was held to obscure substantial differences in the policies employed at Wal-Mart stores because policies differed on a store-by-store basis.  The Wal-Mart plaintiffs hoped to select some example stores and apply damages arising from the policies followed at the example stores to all stores.  No individual could have relied on such evidence in her own action, so the Court ruled that a class could not rely on the evidence to show injury and damages as to all class members.

Many saw Tyson Foods as the Court’s chance to validate statistical averaging in class certification after Wal-Mart.  While some attorneys find that validation, others do not see a dramatic shift.

In antitrust class cases, plaintiffs often rely on expert econometric evidence—in the form of statistical sampling or other representative evidence—to establish liability and calculate damages.  Defendants often vigorously challenge the plaintiffs’ models at class certification.  Tyson Foods may provide a new framework for evaluating statistical evidence in some cases, while defendants are likely to continue to attack the reliability of plaintiffs’ models and question the ability of the evidence to support injury as to most or all class members. 

Additionally, the Court’s emphasis on the fact that Tyson did not challenge the plaintiffs’ experts’ model under Daubert may result in an increase in Daubert motions at the class certification stage.

Practitioners will want to watch for developments on these issues if the Court grants certiorari in Pulaski v. Google (Case No. 15-1101)—a case from the Ninth Circuit holding that class certification may be allowed based on statistical evidence proving damages.

Judge Gonzales Rogers Finds Issues of Fact Regarding Toshiba’s Withdrawal Defense in Batteries

Qianwei Fu
Zelle LLP

The Hon. Yvonne Gonzalez Rogers of the United States District Court for the Norther District of California ruled on March 16, 2006 that the sale of an operating business in the relevant industry may not be sufficient proof of an effective withdrawal from a price-fixing conspiracy.  In re: Lithium Ion Batteries Antitrust Litig., No. 13-md-2420 YGR, 2016 WL 1054584 (N.D. Cal. Mar. 16, 2016).

The case stems from class allegations of a decade-long global conspiracy to fix prices of lithium ion battery (“LiB”) cells, the electrochemical units of a type of rechargeable batteries widely used in consumer electronics products.  Toshiba, one of the alleged conspirators, moved for summary judgment, arguing that plaintiffs’ claims were time-barred because Toshiba ceased LiB cell manufacturing and sales by no later than 2004.  Id. at *1.

Beginning in 2003, Toshiba started to consider exiting the industry by liquidating its LiB business and selling the assets of A&T Battery, the subsidiary that manufactured Toshiba’s LiB cells.  Toshiba discussed selling its LiB business with multiple cell manufacturers in 2003 and 2004, including several alleged conspirators. On January 27, 2004, Toshiba’s management approved an asset transfer agreement with alleged coconspirator Sanyo for the sale of A&T Battery’s LiB cell manufacturing equipment.  On the same day, Toshiba made a public announcement to the Tokyo Stock Exchange that it would “terminate its lithium-ion rechargeable battery business by December 2004.”  Toshiba subsequently executed its agreement with Sanyo on July 22, 2004.  It also sold certain remaining manufacturing equipment to a non-conspirator and discarded the rest.  Id. at *1-2.

The dispute centered on whether Toshiba’s sale of its manufacturing business affirmatively demonstrated its withdrawal from the conspiracy.  Toshiba contended that its exit from the LiB industry was clearly communicated to the world ─ including its customers, suppliers, and the alleged coconspirators ─ through direct communications and extensive media coverage.    Plaintiffs argued that the acts that Toshiba continued to perform post-2004 were not consistent with a withdrawal from the conspiracy.  Notably, Toshiba admittedly stored LiB cells it had manufactured before selling the business and used those cells to manufacture battery packs for use in certain finished products that were sold in Japan for nearly $1 million.  In addition, Toshiba remained a member of the Battery Association of Japan, a trade association through which members allegedly exchanged competitive information.  Toshiba also retained patents relating to LiB batteries, some of which may have been subject to cross-licensing agreements with certain alleged conspirators.  Id. at *2.

The court acknowledged that a defendant’s exit from an industry that is involved in a conspiracy “may constitute effective withdrawal from the conspiracy where the defendant ’retired from the business, severed all ties to the business, and deprived the remaining conspirator group of the services which he provided to the conspiracy.’”  However, the sale of an operating business does not automatically establish effective withdrawal.  “There must be factual inquiries ─ again, with the burden of proof on the defendants ─ into such subjects as the defendants’ continued financial interest in the business that was sold, some continued participation, or some continued benefit from the alleged conspiracy.”  Id. at *4 (citing Morton’s Mkt., Inc. v. Gustafson’s Dairy, Inc., 198 F.3d 823, 839 (11th Cir. 1999) and In re Cathode Ray Tube (CRT) Antitrust Litig., No. 07-5944 SC, 2010 WL 9543295 (N.D. Cal. Feb. 5, 2010)).

Based on evidence presented by the parties, the court found genuine disputes of material fact existed as to whether Toshiba continued to benefit from and participated in the alleged conspiracy.  Id. at *4.  The parties also contested whether Toshiba fraudulently concealed the conspiracy even with an effective 2004 withdrawal and whether Toshiba could be held liable for post-2004 conduct of alleged coconspirators.  The court declined to reach these issues in light of its ruling on the withdrawal defense.  Id. at *3.

From the March 2016 E-Brief

Judge Seeborg Grants Indirect Purchaser Class Status in Optical Disk Drive Antitrust Litigation

Joyce Chang
Cotchett, Pitre & McCarthy, LLP

On February 8, 2016, indirect purchaser plaintiffs (“IPPs”) won class status in In Re Optical Disk Drive Antitrust Litigation (Case No. 3:10-md-2143-RS, Dkt. 1783), a multidistrict litigation alleging a nationwide price-fixing conspiracy in the optical disk drive (“ODD”) industry between 2003 and 2008.  In re Optical Disk Drive Antitrust Litig., 2016 U.S. Dist. LEXIS 15899 (N.D. Cal. Feb. 8, 2016) (“ODD Antitrust Litigation”). Northern District Judge Richard Seeborg denied IPPs’ motion seeking certification of a nationwide class, but granted the motion applying California’s Cartwright Act to indirect purchasers in 24 states.

ODDs, devices that allow data to be read from (and in some cases, written to) optical discs, have applications in a wide variety of consumer electronic devices and are available both as standalone units for purchase, as well as an incorporated device in other products. Familiar forms of optical disks include CDs, which typically contain music or computer software, and DVDs, which often contain movies or other video content. “In a broad sense, the technology [of optical discs] evolved generationally from CDs to DVDs to Blu-Ray Discs, each with the same progression moving from read-only, to recordable, and then to rewritable.” In re Optical Disk Drive Antitrust Litig., 2014 U.S. Dist. LEXIS 142678, *37 (N.D. Cal. 2014). During the putative class period, the prices of ODDs were generally marked by steep declines. IPPs’ theory is that Defendants were “highly motivated to attempt to slow, or at least stabilize, the inevitable decline in prices.”  Id. at *36.

Both direct purchasers (“DPPs”) and IPPs had separately sought class certification in 2014.  Judge Seeborg held then, however, that neither group had sufficiently addressed whether their experts had presented a viable methodology for establishing class-wide antitrust injury and damages as required by Comcast Corp. v. Behrend, 133 S.Ct. 1426 (2013).  In re Optical Disk Drive Antitrust Litig., 2014 U.S. Dist. LEXIS 142678, *324 (N.D. Cal. 2014). Subsequent to that ruling, the DPPs reached settlement agreements with the remaining defendants. The IPPs entered into settlement agreements with certain defendants, and renewed their motion for class certification as to their remaining claims.

Further analysis from the IPPs’ economic expert, Dr. Kenneth Flamm carried the day on the renewed motion: “Dr. Flamm… has done additional work designed to eliminate any doubt that his methodologies are reliably designed to measure class-wide impact… [he] now offers a ‘more extensive’ cointegration analysis… a new ‘Granger casualty’ analysis… [and] has modified his overcharge regression model in four respects…”. ODD Litigation, 2016 U.S. Dist. LEXIS 15899 at *51-54. IPPs also presented “additional graphic evidence and argument to support their claim that prices paid by Dell and HP effectively served as a  ‘floor,’ and that any artificial maintenance of the level of that floor would necessarily impact prices paid by other customers.”  Id. at *54.  IPPs also narrowed the class definition to exclude certain products from the litigation, as well as limiting the damages period they initially alleged.  Id. at *43-44. In doing so, the IPPs contend, “and defendants do not particularly dispute, that the effect of these changes is to remove significant volumes of products to which defendants pointed in their prior motion as reflecting heterogeneity sufficient to defeat class certification.”  Id. at *44. Plaintiffs also proposed a subclass consisting of purchasers of products from Dell and HP, the two computer manufacturers most directly affected by the alleged bid-rigging.  Id.

Judge Seeborg ruled that the IPPs’ class of individuals who purchased devices containing ODDs had met California law requirements of class-wide injury and pass-through: Dr. Flamm “presented theories that explain why, in his view, class-wide impact would have existed, and he has offered means for testing the data to demonstrate that it did, and to calculate what he believes the overcharges were.  Defendants will be free to show why they think Dr. Flamm is wrong, but for purposes of satisfying the requisites of Rule 23, the IPPs have now made an adequate showing of methodology for proving antitrust injury to all or nearly all direct purchasers, on a class-wide basis.”  ODD Litigation, 2016 U.S. Dist. LEXISat *59.

Scope of the Class (Due Process and Choice of Law)
IPPs sought certification of in the following order of preference:
(1) a nationwide class under California law,
(2) a class of plaintiffs from 23 states plus the District of Columbia, under California law, or
(3) 24 separate classes, under the laws of each of the relevant jurisdictions.

ODD Litigation, 2016 U.S. Dist. LEXIS at *76-77.  Since none of the remaining Defendants are based either in California or overseas, Judge Seeborg rejected Defendants’ contention that the application of California offended due process.  Id. at *78.

In analyzing choice of law in this case, all parties agreed that the most significant difference in law among the various jurisdictions was whether a particular jurisdiction followed Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977) or was an “Illinois Brick repealer” state.  In light of this “true conflict,” the Court needed to determine “which state’s interest would be more impaired if its policy were subordinated to the law of the other state.”  See Mazza v. Am. Honda Motor Co., 666 F.3d 581, 589 (9th Cir. 2012).  The IPPs argued that the conflict could be disregarded “because non-repealer states have no particular interest in precluding California from applying its laws to provide remedies to anyone injured by antitrust and unfair competition emanating from the state.” ODD Litigation, 2016 U.S. Dist. LEXIS at *79. Defendants contended that California law should not be applied even as to repealer states because “there still exist numerous differences between the California antitrust and unfair competition laws and those in many of the other 24 jurisdictions.” ODD Litigation, 2016 U.S. Dist. LEXIS at *79.

Judge Seeborg ruled that although a nationwide class under California law could not be certified because it would be “too much of a stretch to employ California law as an end run around the limitations those states have elected to impose on standing,”  Id.  However, he granted the motion as to IPPs in 24 states because, apart from the Illinois Brick conflict, “the potential differences identified between California and some of the other jurisdictions do not appear to stand as true conflicts, or as ones that should not yield to California’s interests.”  Id. at *79-80.

California Court of Appeal Affirms Defense Summary Judgment Over $84M Antitrust Claims Against DirectTV

Jason Bussey
Jonathan Mincer
Simpson Thacher

On January 29, 2016, the California Court of Appeal affirmed a ruling granting summary judgment to DirecTV, Inc. (“DirectTV”) in an antitrust lawsuit brought by Basic Your Best Buy, Inc. (“Basic”), one of DirecTV’s authorized retailers from 1996 to 2008.  Basic Your Best Buy, Inc. v. DirecTV, Inc., No. B258061 (Cal. Ct. App. Jan. 29, 2016) (unpublished) (“Basic Your Best Buy”).

Basic specialized in advertising DirecTV’s satellite entertainment programming services through nationally distributed Yellow Pages telephone directories.  Basic’s operators would attempt to convert into DirecTV subscribers consumers who called toll free numbers owned by Basic.  DirecTV paid Basic a flat fee for each subscription thus generated.  In March 2007, DirecTV prohibited all of its authorized dealers except Basic and another retailer, Direct Sat TV, from placing directory advertisements.  Basic Your Best Buy, No. B258061 at 4.

In 2008, DirecTV notified Basic of its intent to terminate its relationship with Basic pursuant to the termination provision in the parties’ agreements.  Basic thereafter spent $2.7 million on DirecTV ads to which it had committed before receiving the  notice of termination.  Basic expected those ads, as well as previously placed ads, to continue generating sales leads for some time because consumers often retain telephone directories for several years.  Numerous DirecTV authorized dealers expressed an interest in buying these sales leads from Basic and two requested, but were denied, DirecTV’s approval to bid on the leads.  Ultimately, no authorized dealers bid on Basic’s leads out of concern that, if they did, DirecTV would terminate them as authorized dealers.  With no other prospective buyers, Basic was forced to sell the leads to DirecTV at what contended was a below-market price. Id. at 5.

In 2011, Basic sued DirecTV in Los Angeles Superior Court alleging a single cause of action for conspiracy to restrain trade in violation of the Cartwright Act.  Basic’s theory was that by prohibiting other authorized dealers from bidding on Basic’s sales leads, DirecTV had monopsonistically restrained competition for such sales leads.  As a result, DirecTV was able to purchase the leads for nearly $30 million less than their market value. Id. Altogether, Basic sought $83.7 million in trebled damages.

In 2014, DirecTV moved for summary judgment, arguing that it had not engaged in any restraint of trade.  The trial court granted the motion, holding that even though DirecTV marketed its own services to consumers, it was not a horizontal competitor of Basic, so its agreements with other retailers prohibiting them from purchasing Basic’s leads did not constitute horizontal agreements.  The court also found no vertical price-fixing agreement and, applying the rule of reason, insufficient evidence of a product market in which Basic allegedly suffered harm.   Id. at 15.

The Court of Appeal affirmed the trial court’s grant of summary judgment on similar grounds.  The court found that DirecTV was not a horizontal competitor of its alleged co-conspirators—the authorized resellers whom it had prohibited from bidding on Basic’s sales leads—but instead stood in a vertical relationship with them.  The court then analyzed whether, despite the vertical relationship, the agreements between DirecTV and its authorized resellers could be considered horizontal restraints, specifically group boycotts, that constituted per se violations of the Cartwright Act. 

In holding that the agreements were not horizontal restraints, the court focused on Bert G. Gianelli Distributing Co. v. Beck & Co., 172 Cal. App. 3d 1020 (Cal. Ct. App. 1985),which held that proving a per se illegal group boycott involving a vertical participant requires showing that the restraint was “conceived of and initiated by” the plaintiff’s horizontal competitors, who “used their economic power or position to influence the manufacturer to act, not for its own advantage, but solely for the advantage of those competitors.”  Id. at 1042.  Here, the Court of Appeal found, DirecTV had allegedly coerced its authorized resellers, rather than the other way around, so there was no per se illegal agreement.  Basic Your Best Buy, No. B258061 at 12.

The Court of Appeal also relied on several federal court cases that do not require a showing that the alleged restraint be “conceived of and initiated by” horizontal competitors, but instead, focus on whether the purpose and effect of the alleged conspiracy is horizontal, such as to reduce price competition.  See, e.g., Rossi v. Standard Roofing, Inc., 156 F.3d 452, 462 (3d Cir. 1998) (“a conspiracy is horizontal in nature when a number of competitor firms agree with each other and at least one of their common suppliers or manufacturers to eliminate their price-cutting competition”) (emphasis added).  One federal case that Gianelli cited involved an agreement initiated, not by a horizontal competitor, but by a manufacturer: “[I]n this situation, . . . the pressure for the most part was exerted vertically [by the manufacturer].”  Com-Tel, Inc. v. DuKane, Corp., 669 F.2d 404 (1982).  The court in Com-Tel found a horizontal conspiracy, nonetheless, because the “the desired impact (of the restraint was) horizontal,” with the effect of reducing competition without promoting interbrand competition (the usual benefit of vertical restraints).  Id. (internal quotation marks omitted).  Had the Court of Appeal applied the rule from the federal cases it cited, it may have had a more difficult analysis.  That is, by following the rule in Gianelli that an agreement is per se illegal only if it is initiated by horizontal competitors, the Court of Appeal avoided resolving whether, as Basic argued, the purpose and effect of the agreement was to reduce price competition for Basic’s sales leads.

In addition, the court found no horizontal agreement for an independent reason: there was no evidence of an agreement between DirecTV and any horizontal competitor of Basic.  The court found that Basic had only one horizontal competitor: Direct Sat TV, the sole entity besides Basic that DirecTV had contractually allowed to utilize directory advertisements.  Basic did not allege that Direct Sat TV sought to purchase Basic’s sales leads or that there was an agreement between DirecTV and Direct Sat TV not to do so.  Basic Your Best Buy, No. B258061 at 14.
As for other authorized resellers, arguably there was a coerced agreement between them and DirecTV, as evidenced by their decision not to bid for Basic’s sales leads after expressing an interest in doing so.  But the Court of Appeal interpreted the contractual language between them and DirecTV to be dispositive in establishing that they did not compete horizontally with Basic.  The contracts prohibited “utilizing” directory advertisements, which the court, citing, interpreted as including turning those advertisements “to profitable account.”  Accordingly, the court held, these resellers were barred not only from placing directory advertisements, but also from receiving calls generated by such advertisements. Id.

Finally, the Court of Appeal found no triable issue under the rule of reason as to whether there was a vertical restraint of trade.  The court explained that Basic had failed to meet the threshold requirement of delineating a relevant market in which it had allegedly suffered harm.  Basic had attempted to limit the relevant market to DirecTV sales leads, but its economic expert failed to explain why the relevant market should be limited to a single brand of leads.  “There is no analysis to show why DirecTV sales leads are not part of the larger market for cable and satellite sales leads, or entertainment sales leads, or sales leads generally.”  Id. at 18. The court ruled that the case was unlike Eastman Kodak Co. v. Image Technical Services, Inc., where the Supreme Court found a relevant market limited to a single brand because customers were locked into using Kodak’s unique replacement parts before Kodak squeezed out independent service providers and began charging higher prices to service parts itself.  504 U.S. 451 (1992).  Here, Basic was well aware going into the relationship with DirecTV that DirecTV could control what advertising channels it used and could terminate the relationship for any or no cause.  Without providing a cognizable relevant market definition, the court concluded, Basic could not show a vertical restraint.  Basic Your Best Buy, No. B258061 at 15.

Basic’s theory represents an attempt to expand the scope of horizontal agreements under the Cartwright Act to include a manufacturer that nominally participates in the same downstream market as the plaintiff.  Given federal courts’ rejection of similar arguments, it is unsurprising that both the trial court and Court of Appeal did so here, especially given that California law, as outlined in Gianelli, appears to set a higher bar for establishing manufacturer-distributor group boycotts than do some federal cases.

Fourth Circuit Rejects Market Definitions and Tying Claims That Defy Economic Realities in the Live Music Market

Lee F. Berger
Nina Gupta
Paul Hastings LLP

In a decision railing against the anticompetitive effects of overly litigious competitors, the Fourth Circuit emphasized economic realities in affirming summary judgment in favor of a national concert promoter over a regional rival, dismissing monopolization and tying claims.  It’s My Party, Inc. v. Live Nation, Inc., 2016 U.S. App. LEXIS 1882 (4th Cir. 2016) (“My Party”).

Plaintiff It’s My Party (“My Party”) and defendant Live Nation are competitors in the live music industry: both promote concerts and operate outdoor amphitheaters.  While My Party is a regional player, promoting concerts and working with venues in the Washington, DC, and Baltimore area, Live Nation provides services to artists throughout the United States and has exclusive booking rights at venues across the country. My Party claimed that Live Nation’s conduct foreclosed competition in the concert promotion and venue markets: the market for promoting concerts and the market for concert venues.  In both markets, the relevant consumers are performing artists. My Party, 2016 U.S. App. LEXIS, at *6.

The Fourth Circuit first rejected My Party’s monopolization claims by disagreeing with My Party’s market definitions.  First, My Party characterized the concert promotion market as national.  But the Fourth Circuit explained that the relevant geographic market is the area where the defendant’s customers could turn to alternative suppliers if the defendant raised its prices:  here, the area where artists can find alternative promoters if Live Nation raises its prices.  Applying this definition, the Fourth Circuit found that promoting shows is localized.  An artist performing in Baltimore is unlikely to switch to a promoter based elsewhere, even if the Baltimore promoter charges more.  Notably, Live Nation, a national promoter, focuses on local advertising and promotes concerts through regional offices.  Id. at *8.

Second, My Party characterized the concert venue market as including major amphitheaters only.  Noting that only two venues in the entire Washington-Baltimore area meet this specification, the court said that My Party’s approach is “akin to defining a market to include tennis players who have won more than three Olympic gold medals and finding that only Venus and Serena Williams fit the bill.”  Id. at *9. The test for determining whether a product commands a distinct market depends on whether it is “reasonably interchangeable.”  Id. at *10.  The record contained no evidence demonstrating that amphitheaters comprise their own market and that artists who prefer amphitheaters would not turn to a lower-priced substitute.  Id.

Moving to My Party’s tying claims, the court rejected My Party’s arguments that artists who hire Live Nation for their promotion services are compelled to perform at Live Nation’s venue.  Instead, the Fourth Circuit found that artists were free to turn down the venue, even if they hired Live Nation for promotion services.  The court similarly denied My Party’s second tying claim: that Live Nation only gives artists access to its amphitheaters in other locations if they choose Live Nation’s amphitheater for their Washington-Baltimore concert.  The record showed that about one fourth of customers performed at Live Nation amphitheaters in other locations but chose My Party’s venue for their Washington-Baltimore concert.

The panel deferred to the free marketplace and chastised the plaintiff for ignoring “market realities.” Id. at *12.  The court took issue with My Party’s market definitions, stating that they were “plainly designed to bolster [My Party’s] monopolization and tying claims by artificially exaggerating [Live Nation’s] market power and shrinking the scope of artists’ choices.”  Id. at *6.  The panel said My Party’s market definitions “are blind to the basic economics of concert promotion.”  Id. at 7.

The Court of Appeals also warned against the anticompetitive consequences that can result from antitrust lawsuits.  Lawsuits between competitors, especially, can lead to “an environment of commercial parochialism.”  Id. at *33. The panel emphasized that in our increasingly interconnected world, it often makes sense to offer consumers bundled packages, like concert promotion services and a concert venue.  If My Party’s view of economic activity took hold, the court warned that the loser would be the consumer, “left with a patchwork of localized monopolies and one-product wonders flourishing at the expense of larger and more diverse competitors.”  Id. Rejecting judicial intervention in the free market, the Fourth Circuit ended the opinion with a strong, pro-free-market flourish: “To help prevent antitrust law from being hijacked for such anticompetitive ends, we join the district court in sending this tussle between two rivals back to the marketplace from whence it came.”  Id. at *34.

From the February 2016 E-Brief

In the Matter of LabMD: FTC Claims Of Deficient Security Practices Dismissed Based on Insufficient Evidence of Actual Harm

Scott Lyon
Sedgwick LLP

In In the Matter of LabMD Inc., Docket No. 9357, the Federal Trade Commission’s (“FTC”) unfair data security practices case against LabMD, a clinical testing laboratory, was dismissed by FTC Chief Administrative Law Judge D. Michael Chappell for failing to meet its burden of proving that the healthcare provider’s allegedly deficient security practices caused, or were likely to cause, substantial consumer injury.


LabMD’s primary business consisted of providing tissue sample analysis by pathologists specializing in prostate or bladder cancer.  Urologists sent LabMD specimens for analysis from patients throughout the country, by which LabMD came into the possession of protected health information (“PHI”) belonging to thousands of patients.

In February 2008, Tiversa, a security firm based in Philadelphia, Pennsylvania, discovered that a LabMD insurance report was being shared openly by a LabMD billing computer on the Limewire peer-to-peer network when an employee downloaded it along with other personal files.  The report (referred to in the matter as the “1718 File”) was found to contain PHI and personally identifiable information (“PII”) of approximately 9,300 patients, including their names, dates of birth, Social Security numbers, codes for laboratory tests conducted, and, in some cases, health insurance company names, addresses, and policy numbers.  After discovering that the 1718 File contained patient PHI, Tiversa used the “browse host” function of LimeWire to obtain a list of all other files being shared on the LabMD billing computer.  The 1718 File was among 950 other shared files in the “My Documents” directory on the LabMD computer, most of which consisted of music and video files.  However, eighteen documents were also being shared at the same time, three of which also contained patient PHI.

Tiversa contacted LabMD in May 2008, disclosed its download of the 1718 File, and offered its remediation services.  In July 2008, LabMD rejected Tiversa’s proposal and proceeded to remove the file-sharing software and re-assess its network’s security (although the FTC later claimed that its remediation efforts were also insufficient).   In 2009,  the FTC served a Civil Investigative Demand on Tiversa’s affiliate, The Privacy Institute.  Tiversa responded by producing a spreadsheet of companies which, according to Tiversa, had exposed the personal information of 100 or more individuals.  Among the names provided to the FTC  was LabMD, together with a copy of the 1718 File.  This disclosure led the FTC to open an investigation of LabMD, which ultimately resulted in the action against it for failing to implement reasonable security, an alleged unfair practice.

It is at this point that the parties’ allegations (and consequently Judge Chappell’s Initial Decision) become mired in conspiracy theories.  After the FTC began its action against LabMD, the Tiversa forensics analyst who originally found the 1718 File alleged that Tiversa had adopted a business practice of investigating companies on its own initiative in order to identify data security issues.  Once a data security vulnerability was identified, the Tiversa analyst claimed that the company would exaggerate how widely erroneously shared files had spread across peer-to-peer networks and then offer its services to cure the purported security issue.  There were also allegations that in some cases Tiversa would intentionally misrepresent that files had been discovered at IP addresses associated with known or suspected identity thieves.  Tiversa countered that the analyst’s claims were false and motivated by his termination for cause from Tiversa during the pendency of the case against LabMD.  Nevertheless, the accusations resulted in a United States House Oversight and Government Affairs Committee investigation into Tiversa and its involvement with governmental entities. 

Judge Chappell’s Initial Decision addressed the allegations against Tiversa in great detail, ultimately concluding that the Tiversa analyst (a witness for LabMD) was more credible than the CEO of Tiversa, who was a witness for the FTC.  This finding had a profound effect on the outcome of the case, with Judge Chappell wholly discounting the testimony of one of the FTC’s consumer injury experts, reasoning that the expert’s conclusions were based in part on the testimony of Tiversa’s CEO.  Judge Chappell also challenged the expert opinions of the FTC’s other consumer injury expert, stating that although he “did not expressly rely on the discredited and unreliable testimony from [Tiversa’s CEO] as to the ‘spread’ of the 1718 File for his opinions on the likelihood of medical identity theft, this evidence was clearly considered … and it cannot be assumed that [the] opinions were not influenced by his review of [the CEO’s] testimony.”  Initial Decision, p. 67, footnote 31. 

There was also a potential red herring injected into the case, consisting of 40 LabMD paper “day sheets,” 9 patient checks, and 1 money order discovered in the possession of identity thieves in Sacramento, California in 2012.  This resulted in a dispute over how the records had travelled from Georgia to California, with the FTC claiming that they must have been downloaded from LabMD’s insecure network, but lacking evidence to prove this theory.  Somewhat lost in this swirl of accusations was the crux of the case: that LabMD had (inadvertently but apparently undisputedly) openly shared a file containing PHI of approximately 9,300 patients on an open peer-to-peer network, which the FTC alleged was an unfair practice.


The FTC’s authority relating to data security derives from Section 5(n) of the Federal Trade Commission Act (“FTC Act”), which states that the Commission may declare any act or practice “unfair” that “causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition.” (emphasis added.)  The FTC’s complaint alleged that LabMD failed to provide reasonable security because the healthcare provider:

(a)     did not develop, implement, or maintain a comprehensive information security program to protect consumers’ personal information;
(b)     did not use readily available measures to identify commonly known or reasonably foreseeable security risks and vulnerabilities on its networks;
(c)      did not use adequate measures to prevent employees from accessing personal information not needed to perform their jobs;
(d)     did not adequately train employees to safeguard personal information;
(e)      did not require employees, or other users with remote access to the networks, to use common authentication-related security measures;
(f)      did not maintain and update operating systems of computers and other devices on its networks; and
(g)     did not employ readily available measures to prevent or detect unauthorized access to personal information on its computer networks.

Judge Chappell began his analysis by citing Congressional reports for the proposition that Section 5(n) of the FTC Act was intended to limit the scope of the FTC’s authority.  However, rather than evaluating whether LabMD’s security was unreasonable as alleged, the Initial Decision instead focused solely on the issue of whether “substantial consumer injury” was at stake and accordingly, whether the FTC had jurisdiction over the issue.  The decision (a) rejects the FTC’s attempts to support likelihood of harm through surveys of the effect of disclosures of PHI and PII and (b) discounts the potential harm of disclosing patient CPT (current procedural terminology) codes by noting that identity thieves would need to look up the codes on Google or the American Medical Association’s website in order to learn what tests had been performed on specific patients.  Instead, the decision goes to great lengths to attack the credibility of the FTC’s claims and evidence, largely by attacking Tiversa and its CEO as the FTC’s proxy. 

Although the FTC had presented consumer injury expert witness testimony and survey data to demonstrate that the disclosure of consumer PHI/PII could result in various forms of identity fraud and other harms to consumers, Judge Chappell determined that “the absence of any evidence that any consumer has suffered harm as a result of [LabMD]’s alleged unreasonable data security, even after the passage of many years, undermines the persuasiveness of [the FTC]’s claim that such harm is nevertheless ‘likely’ to occur.”  Initial Decision, p. 52.  Ultimately, he found persuasive that, because actual harm had not yet resulted from the allegedly unreasonable security practices over the passage of several years, the practices were not “likely” to cause substantial consumer harm.  Endorsing a narrow view, supported by the unusual circumstances of the case, Judge Chappell ruled that the “substantial consumer injury” required by Section 5(n) could not be satisfied by “hypothetical” or “theoretical” harm or “where the claim is predicated on expert opinion that essentially only theorizes how consumer harm could occur,” and concluded:  “Fairness dictates that reality must trump speculation based on mere opinion.”  Id. , p. 52, 64.


There is no dispute that a LabMD employee placed a file containing PHI of approximately 9,300 patients in a publicly-shared folder on a billing computer.  Anyone with LimeWire or any other Gnutella-based peer-to-peer filesharing software (which was freely available in 2008) could have downloaded any of the 950 files being shared by the LabMD billing computer, including the four containing PHI.  From a credential authentication perspective, this is the equivalent of making these confidential files available for download on a public website, without any requirement for a username or password in order to obtain access.  It is widely accepted, both in state and federal law, that the types of PHI/PII contained in the 1718 File should not be made publicly available in such a manner, particularly by a healthcare provider subject to HIPPA/HI-TECH’s Security Rule.

The Initial Decision’s analysis focuses solely on whether there was an actual or probable injury after-the-fact based on this specific incident (i.e., the 1718 File being downloaded by a security researcher such as Tiversa), instead of whether the practice itself (i.e., openly sharing a file containing PHI on 9,300 patients on an open peer-to-peer network which could have been downloaded by anyone) caused or was likely to cause substantial consumer injury.  Actual or imminent injury is a requirement for standing in civil litigation, but the likelihood of substantial consumer harm is the proper standard for evaluating the FTC’s regulatory authority.  In LabMD’s case, there were windfall events that saved the company from a much more disastrous result: (1) the 1718 File was found (so far as currently known) only by Tiversa and not identity thieves, and (2) Tiversa notified LabMD of the exposure shortly after its discovery, which was quickly corrected. 

Consider what would have happened if the 1718 File had instead been discovered by an identity thief rather than Tiversa – the outcome would have been different (and likely much worse) for reasons totally unrelated to the security practice itself (i.e., the practice of openly sharing PHI had little or no effect on who actually discovered the file).  To evaluate the reasonableness of LabMD’s practices in the first instance based on subsequent circumstances over which it had no control (i.e., the identity of the discoverer) judges the wrongfulness of the act solely by its accidental consequences – effectively, a “no harm, no foul” rule. 
The effect of the LabMD decision may actually be rather narrow, as it is based on specific and unusual circumstances limiting the likelihood of harm.  Other situations with a similar data security issue could well have a different result.  Thus, in considering the decision and its likely effect on other matters, the “reasonable security” aspect of the required analysis should be taken into consideration.

The Initial Decision states that “to base unfair conduct liability upon proof of unreasonable data security alone would, on the evidence presented in this case, effectively expand liability to cases involving generalized or theoretical ‘risks’ of future injury, in clear contravention of Congress’ intent, in enacting Section 5(n), to limit liability for unfair conduct to cases of actual or ‘likely’ substantial consumer injury.” Initial Decision, p. 89.  The Initial Decision attempts to graft the requirement of actual or imminent harm required in civil litigation onto the scope of the FTC’s authority.  This disregards the statute’s inclusion of the terms “likely” and “risk,” which both relate to the possibility or probability that an event may occur.  The key issue relating to FTC authority is whether it includes the authority to  pre-emptively address unfair trade practices before innocent consumers are harmed, rather than wait until there is actual harm. 

LabMD’s storage of the 1718 File in a shared folder on a peer-to-peer network could be analogized to leaving the doors and vault of a bank unlocked when no one was inside – the critical question is whether such an act (or practice) is likely to cause substantial consumer injury.  Should the answer be dependent upon whether any money was actually stolen during the months it was left unlocked?  Or should it be focused on the existence of the practice itself – that is, leaving the protected assets inside vulnerable so that the only determinative factor between a potential and an actual theft is whether the wrong person checks whether the doors are locked?  Does the fact that a thief did not test the doors during that period absolve the bank of otherwise reckless behavior? 

By focusing solely on the harm prong, and not addressing the issue of reasonable security, the Initial Decision sidestepped an opportunity to evaluate the issue of what constitutes reasonable security and what puts protected information unreasonably at risk.  If the goal is regulation of practices likely to result in harm before the harm occurs, perhaps the focus should be on the conditions existing during the period that the bank was left unlocked (or the practice existed) and, based on those conditions, evaluate whether the practice was reasonable.  In the case of data security, the analysis generally includes the type of information that was exposed (i.e., PHI/PII v. public information), how that type of information could be used to harm consumers (i.e.. susceptibility to abuse by identity thieves, extortionists, or others), what measures were taken to safeguard the information from exposure (i.e., was it a complex “hack” of a computer network involving exploitation of zero-day vulnerabilities versus downloading a file from a publicly-available website with no access controls), and what security measures are reasonable under the circumstances (in terms of time, cost, manpower, and other factors).  These are among the factors identified by the FTC’s expert but which the Initial Decision declined to consider because of the taint of Tiversa’s involvement.  This approach avoided the reasonableness analysis, which is likely to be a factor in future cases without such salacious conspiracy theories.


Complaint Counsel has filed an appeal of the Initial Decision.  While the Third Circuit’s opinion in FTC v. Wyndham Worldwide Corp. previously recognized the FTC’s authority to actively challenge deficient cybersecurity practices without first announcing the standards to be implemented, that case involved multiple breaches and actual consequential harm to the customers whose personal information was exposed. At stake now is whether federal courts will similarly scrutinize the scope of the FTC’s authority to pre-emptively challenge deficient security practices without proof of actual consumer harm.  An adoption of Judge Chappell’s analysis would substantially limit the FTC in this area to intervene only after consumers are demonstrably injured or such injury is deemed imminent.  Unless reversed, the LabMD Initial Decision also could create a perception of the FTC’s vulnerability on the issue of its own authority and lead other companies accused of deficient security practices to challenge the regulatory agency with greater chance for success than before this decision. 

Recent U.S. Supreme Court Decision Makes It More Difficult For Defendants To Settle TCPA Cases And Other Consumer Class Actions

By Lori Chang
Greenberg Traurig, LLP

The Telephone Consumer Protection Act (“TCPA”) prohibits any person or company from using an “automatic telephone dialing system” to make a call or send a text message for a non-emergency purpose to a mobile number without the recipient’s prior express consent. 47 U.S.C. § 227(b)(1).  A person who received such a call in violation of the TCPA may bring a cause of action to recover actual monetary loss or $500 in statutory damages for each violation; if it is found that a defendant willfully or knowingly violated the TCPA, damages may be trebled.  Id. § 227(b)(3).

In Campbell-Ewald Co. v. Gomez, 577 U.S. ___ (2016), the plaintiff-respondent Jose Gomez brought a putative class action suit under the TCPA arising out of a single, and allegedly unsolicited, text message sent by the defendant-petitioner Campbell-Ewald Company (“Campbell”), a national marketing agency engaged by the U.S. Navy to develop and implement a recruiting campaign.  Mr. Gomez’s maximum recovery against Campbell was $1,500.

Campbell sought to end the dispute by offering Mr. Gomez full relief on his individual claim. Prior to the plaintiff’s deadline to file a motion for class certification, Campbell made an offer of judgment pursuant to Fed. R. Civ. P. 68 to pay Mr. Gomez $1,503 for each alleged text message (subject to proof), his costs (excluding attorneys’ fees, which are not recoverable under the statute), and a proposed stipulated injunction in which Campbell denied liability and agreed it would not send text messages in violation of the TCPA. Mr. Gomez did not accept the offer.

After the Rule 68 offer had lapsed, Campbell moved to dismiss the case for lack of subject matter jurisdiction, arguing that its offer mooted Mr. Gomez’s individual claim by providing complete relief, and therefore, no Article III case or controversy remained.  The district court denied the motion, but subsequently granted Campbell summary judgment on other grounds.  On appeal, the Ninth Circuit held that “an unaccepted Rule 68 offer of judgment—for the full amount of the named plaintiff’s individual claim and made before the named plaintiff files a motion for class certification—does not moot a class action.” 768 F.3d 871, 875 (9th Cir. 2011).

The United States Supreme Court affirmed, holding that a defendant’s unaccepted Rule 68 offer of judgment “has no force” and “does not moot a plaintiff’s case.” Campbell-Ewald Co. v. Gomez, 577 U.S.___.  In adopting Justice Kagan’s dissenting opinion in Genesis HealthCare Corp. v. Symczyk, 569 U.S.__ (2013)—stating that an unaccepted offer of judgment, “like any unaccepted contract offer,” is “a legal nullity”—Justice Ginsburg, writing for the 6-3 majority, explained the Court’s holding was based on “basic principles of contract law,” as follows:

Absent Gomez’s acceptance, Campbell’s settlement offer remained only a proposal, binding neither Campbell nor Gomez. [Citations omitted.]  Having rejected Campbell’s settlement bid, and given Campbell’s continuing denial of liability, Gomez gained no entitlement to the relief Campbell previously offered. . . . In short, with no settlement offer still operative, the parties remained adverse; both retained the same stake in the litigation they had at the outset.

The majority opinion rejected Campbell’s reliance on 19th-century railroad tax cases in which the defendants were deemed to have “extinguished” tax claims brought against them by offering to pay the taxes owed and having actually deposited the full amount in a bank in the state’s name.  Those cases also rested on California substantive law requiring the state to accept a taxpayer’s full payment—unlike here, where Mr. Gomez was free to reject Campbell’s offer.  Accordingly, in the majority’s view, “when the settlement offer Campbell extended to Gomez expired, Gomez remained empty-handed; his TCPA complaint, which Campbell opposed on the merits, stood wholly unsatisfied”; and “[b]ecause Gomez’s individual claim was not made moot by the expired settlement offer, that claim would retain vitality during the time involved in determining whether the case could proceed on behalf of a class.”

Justice Thomas concurred in the judgment only, concluding that “common-law history of tenders,” and not “modern contract law principles,” supported ruling that Campbell’s “mere offers did not deprive the District Court of jurisdiction.”

Chief Justice Roberts in his dissent, joined by Justices Scalia and Alito, viewed the issue as “not whether there is a contract; it is whether there is a case or controversy under Article III,” and “[i]f the defendant is willing to give the plaintiff everything he asks for, there is no case or controversy to adjudicate, and the lawsuit is moot.”

According to the dissent, “[t]his case is straightforward”: “Based on Gomez’s allegations, the maximum that he could recover under the [TCPA] is $1500 per text message, plus the costs of filing suit.  Campbell has offered to pay Gomez that amount, but it turns out he wants more.  He wants a federal court to say he is right.” The Chief Justice wrote further that “[t]he problem for Gomez is that the federal courts exist to resolve real disputes, not to rule on a plaintiff’s entitlement to relief already there for the taking.”

Also finding support in history, Chief Justice Roberts reasoned that Mr. Gomez could no more ask the district court to “say he is right,” than President George Washington could ask the Supreme Court in 1793 for an advisory opinion on the rights and obligations of the United States with respect to the war between Great Britain and France, in which the Court “politely—but firmly—refused the request.”

On this issue, the dissent concluded that “this case is limited to its facts,” where “[t]he majority holds that an offer of complete relief is insufficient to moot a case,” but “does not say that payment of complete relief leads to the same result.” Indeed, the majority made clear that its decision left open the issue of “whether the result would be different if a defendant deposits the full amount of the plaintiff’s individual claim in an account payable to the plaintiff, and the court then enters judgment for the plaintiff in that amount.”

But while both the majority and dissenting opinions suggest that the case may have been decided differently if Campbell’s offer was accompanied by actual payment, the real issue may have been best summed up by the majority’s determination that “a would-be class representative with a live claim of her own must be accorded a fair opportunity to show that certification is warranted.”  As Justice Ginsburg observed, by offering to settle Mr. Gomez’s individual claim, “Campbell sought to avoid a potential adverse decision, one that could expose it to damages a thousand-fold larger than the bid Gomez declined to accept.”  Clearly, what was at stake was not the $1,500 or simply a matter of having a federal court rule that Mr. Gomez “is right.”

From the January 2016 E-Brief

California Supreme Court Rules That Organic Labeling Suits Are Not Preempted

By Joyce M. Chang, Cotchett, Pitre & McCarthy, LLP

California consumers can now challenge whether a farm falsely labeled its herbs as "organic." The California Supreme Court unanimously held in Quesada v. Herb Thyme Farms, Inc. that a state law claim alleging that produce is being intentionally mislabeled as organic is not preempted by federal law regulating organic produce, overturning an appellate court's ruling to the contrary. Quesada v. Herb Thyme Farms, Inc., 62 Cal.4th 298 (2015).

Plaintiff Michelle Quesada ("Quesada") purchased Defendant Herb Thyme's ("Herb Thyme") herbs at a premium under the belief that they were 100 percent organically grown. Herb Thyme’s herbs – both conventionally grown and organically grown – were blended in packages bearing the "Fresh Organic" label. In fact, some Herb Thyme packages labeled as organic contained herbs that were entirely conventionally grown. Plaintiff Quesada's lawsuit challenged as false advertising and unfair competition this practice of selling conventionally grown herbs under an organic label.

While both lower courts found for Herb Thyme, the California Supreme Court disagreed that consumer actions such as Quesada's was preempted either expressly or impliedly by the Organic Foods Act (7 U.S.C. § 6501 et seq.) (the "Act"). Rather, "[w]hen Congress entered the field in 1990, it confined the areas of state law expressly preempted to matters related to certifying production as organic, leaving untouched enforcement against abuse of the label 'organic.'" 62 Cal.4th at 303. Furthermore, one of Congress' "central purpose[s] behind adopting a clear national definition of organic production was to permit consumers to rely on organic labels and curtail fraud." Id. Allowing "prosecution of such fraud… can only serve to deter mislabeling and enhance consumer confidence." Id. at 317. Therefore, state lawsuits such as Quesada's alleging intentional organic mislabeling actually promote and advance, rather than hinder or impair, Congress's purposes and objectives. Id. at 323.

Practitioners expect to see an increase of state law consumer class actions challenging California growers' and sellers' use of the organic label, particularly when the product at issue contains a mixture of conventionally grown produce and organically grown produce.

The Yates Memorandum and Antitrust Leniency

By Michael L. Spafford, Lee F. Berger and Matthew T. Crossman, Paul Hastings LLP


On September 9, 2015, Deputy Attorney General Sally Quillian Yates issued to all Department of Justice (“DOJ”) attorneys a memorandum (“Yates Memo”) concerning the department’s handling of corporate investigations and which included an increased focus on individual misconduct and a corresponding decrease in opportunities for individual immunity resulting from corporate resolutions. This material development likely will have a significant impact on the ability of corporations and counsel to ensure that executives fully cooperate in internal investigations.

The Yates Memo also raises a key question for antitrust practitioners: in a world where the government is intent on prosecuting individuals involved in corporate misconduct, does the Antitrust Division’s Leniency Program survive in its current form?

The Yates Memo

In the wake of the financial crisis leading to the "Great Recession" and driven by the DOJ’s failure to prosecute Wall Street executives, many of whom were protected in agreements with their employers, the Yates Memo outlines six key policies seeking to hold individuals accountable in corporate wrongdoing: (i) corporations receive cooperation credit only if the company discloses “all relevant facts about individual misconduct” no matter their position or seniority within the company; (ii) investigations should focus on the individuals involved from the outset of the investigation; (iii) criminal and civil DOJ attorneys should closely coordinate their efforts; (iv) except in “extraordinary circumstances” or through “approved departmental policy,” corporate resolutions will not provide immunity to individuals; (v) DOJ attorneys should have a “clear plan” with regard to investigations of culpable individuals when corporate resolutions are reached; and (vi) for civil investigations, the decision to pursue an individual should be based on a number of factors, including the seriousness of the conduct, whether the misconduct is actionable, and deterrence, rather than solely their ability to pay.

These objectives illustrate a new way forward in the DOJ's pursuit of individual wrongdoing in the corporate context. As a result, companies and counsel must now consider the serious implications of the Yates Memo on the incentives for self-reporting and cooperation.

DOJ Antitrust Division Leniency Program

The modern DOJ Antitrust Leniency Program, introduced in 1978 and significantly revised via amendments in 1993 (Corporate Leniency Policy) and 1994 (Individual Leniency Policy), is a powerful and highly valued tool for DOJ prosecutors pursuing corporate wrongdoing in the antitrust arena. In the words of the DOJ, the Leniency Program is undeniably the “most important investigative tool for detecting cartel activity.” Under the Leniency Program, also known as the amnesty program, a corporation that is first to self-report cartel activity to the Antitrust Division is granted full amnesty from criminal prosecution provided that (i) the Division had not received information about the illegal activity from another source; (ii) the company promptly and effectively terminated its participation; (iii) the company reports the wrongdoing with candor and completeness, and fully cooperates in the DOJ’s investigation; (iv) the confession is a corporate act, as opposed to that of individual executives or officials; (v) where possible, the corporation makes restitution; and (vi) the company did not originate or lead the activity, or coerce others to participate.

Importantly, the grant of full amnesty extends not only to the corporation, but also to all officers, directors, and employees who admit their involvement as part of the corporate disclosure.

While the formal Leniency Program applies only to the first-in conspirator, subsequent cooperating conspirators in practice typically receive greater cooperation credit and employee immunity based on the order in which the corporations self-disclosed their conduct to the DOJ. Before the Yates Memo, the practice had been for each cooperating corporation to enter a plea agreement granting immunity to all officers and employees except for 2-8 individuals, who are “carved out” of the plea agreement and could be subject to prosecution. In most cases, only a portion of the carved-out individuals were ultimately prosecuted.

The Yates Memo May Undermine Antitrust Division Investigations

While the Yates Memo is unlikely to have much effect on the formal application of the Antitrust Division’s Leniency Program, there may be more substantial effects for cooperating conspirators who are not the first to self-report.

The Yates Memo expressly carves out the Corporate Leniency Policy as an “approved departmental policy” from the requirement that DOJ prosecutors “should not agree to a corporate resolution that includes an agreement to dismiss charges against, or provide immunity for, individual officers and employees.” Moreover, one of the primary policy objectives of the Yates Memo – requiring full and complete disclosure of all relevant facts about individuals involved in corporate misconduct – is already built in to the existing Leniency Program framework. Thus, the fundamental objectives of the Yates Memo and the Leniency Program are largely consonant and companies who qualify for amnesty should anticipate no significant changes despite the DOJ’s significant shift in priorities.

The real impact of the Yates Memo in the antitrust arena is instead likely to be felt by companies that – either by not being first in line or not meeting the required criteria – are not eligible for full amnesty. Those companies seeking to negotiate plea agreements with the government may encounter a decidedly new and untested bargaining landscape.

At a fundamental level, the Leniency Program functions because the incentives for cooperating outweigh the punitive effects of non-cooperation. Under the pre-Yates Memo practice, the carve outs and cooperation credit offered to the “second in line” were more favorable, in most cases, than those offered to subsequent cartel participants seeking leniency. Although the fourth or fifth member of the cartel likely faced stiffer penalties, there remained a significant incentive to seek out cooperation credit. But the Yates Memo’s policy barring any individual immunity in plea agreements absent “extraordinary circumstances” or “approved departmental policy,” threatens to foreclose this practice, since the Leniency Program on its face only applies to the first-in conspirator.

The Yates Memo also suggests that the “extraordinary circumstances” exception will be interpreted narrowly by requiring the approval of the Assistant Attorney General for its application. Thus, under a straight-forward interpretation of the Yates Memo, very few antitrust plea agreements, if any, will include immunity for officers or employees. Unfortunately, by reducing the incentives to cooperate, the Yates Memorandum may have the effect of discouraging corporate cooperation from non-amnesty conspirators, especially foreign companies who may place a high value on protection of their officers and employees.

The implementation of the Antitrust Division’s leniency practices have been effective and has resulted in the prosecution of many individuals. It would seem unwise to upset this proven approach by a rigid application of the Yates Memo’s policies. Given the Antitrust Division’s established track record, the Assistant Attorney General may readily agree to Antitrust Division attorneys’ requests for exceptions to the Yates Memo’s ban on employee immunity. But it remains to be seen how this ban will be implemented and what additional hurdles will be required before any exceptions to the Yates Memo will be granted.

The potential disincentive to cooperate also may change the calculation for officers and employees considering whether to cooperate fully in internal investigations. Effective and robust internal investigations rely heavily on the full participation and cooperation of key individuals who witnessed or were potentially involved in the problematic conduct. This cooperation historically has been secured in part through the potential immunity offered through the Leniency Program and plea agreements (with individual counsel for the most culpable individuals typically obtained at some point in the process). If the Yates Memo signals a new approach towards holding individuals more accountable for corporate wrongdoing and creates uncertainty as to whether they can be protected by a corporate plea agreement, employees may be more hesitant to participate in internal investigations out of fear of implicating themselves, or their co-workers, and the resulting prosecutions. Companies also may have to be increasingly sensitive to the manner in which they conduct internal reviews, including ensuring highly rigorous Upjohn advisements that provide sufficient notice and opportunity for potentially implicated employees to obtain independent legal counsel earlier in the process. These challenges may undermine the overall effectiveness and timeliness of internal investigations, thus limiting the quality and completeness of any disclosures ultimately made the DOJ.


While it remains to be seen how the Yates Memo will be implemented, its focus on pursuing individuals involved in corporate wrongdoing could undermine the effectiveness of the Division’s antitrust investigations by forcing a realignment of the incentives for cooperation by companies and individuals not eligible for amnesty under the Antitrust Division’s amnesty program.

From the December 2015 E-Brief

Third Circuit Revives In Part Google Cookie Placement Litigation

By Thomas N. Dahdouh
Regional Director, Western Region, FTC*
*Views expressed herein are solely and completely the personal views of the author only and do not necessarily reflect those of the Commission or any Commissioner.   

Following closely on the heels of its reinvigoration of the FTC’s lawsuit against Wyndham for privacy violations, Federal Trade Commission v. Wyndham Worldwide Corp., 799 F.3d 236, (3d Cir. 2015), the Third Circuit in In re: Google Inc. Cookie Placement Consumer Privacy Litigation, 2015 U.S. App. LEXIS 19581 (3d Cir. Del. Nov. 10, 2015) has once again revived a privacy violation lawsuit that had been dismissed by the district court.  Although the court dismissed the three federal law counts and the California UCL count, it upheld plaintiffs’ standing against a broad-brush assault and reinstated plaintiffs’ counts alleging violations of the California Constitution’s protections of privacy, as well as California tort law.  The decision, though, may be further adversely affected by a pending Supreme Court decision. 

This case concerns Google’s and other defendants’ efforts to circumvent web browser “cookie blockers.”  Cookies – particularly third party cookies – are used by advertising companies to help create detailed profiles on individuals.  Both Microsoft’s Internet Explorer and Apple’s Safari gave users the ability to either refuse all cookies or to indicate when a cookie was being sent.  But, as revealed by Stanford graduate student Jonathan Mayer in 2012, Google and the other defendants had discovered, and were surreptitiously exploiting, loopholes in both the Safari cookie blocker and the Internet Explorer cookie blocker.  These loopholes enabled the placement of cookies on browsers notwithstanding that the blocker was designed to prevent it.  Google took these actions despite explicitly stating in its Privacy Policy that users “can reset your browser to refuse all cookies or to indicate a cookie is being sent.”  In 2012, Google settled FTC charges involving this situation, paying a $22.5 million settlement.  United States v. Google, Inc., N.D. Cal, No. 21-cv-4177.

Standing: The Third Circuit quickly dismisses defendants’ arguments that the plaintiffs lack standing because they cannot show any economic loss.  The court found that the plaintiffs could show injury-in-fact because they could show violation of statutes that create legal rights.  Notably, the issue of whether violation of a legal right alone creates the injury-in-fact necessary for standing is one that the Supreme Court is currently debating in the appeal of Spokeo v. Robins, 742 F.3d 409 (9th Cir. 2014) heard on November 2, 2015.  Consequently, the Spokeo appeal may impact this part of the Third Circuit’s holding, which, in turn, could impact the entire holding here.

Below I summarize the key holdings of the court with respect to, first, the federal law counts and, second, with respect to the California state law counts. 

Federal Law Counts

Federal Wiretap Act: The vast bulk of the opinion is devoted to an analysis of the Federal Wiretap Act’s applicability to the conduct at issue here, particularly 18 U.S.C. § 2511.  The statute requires evidence that the defendant (1) intentionally (2) intercepted, endeavored to intercept or procured another person to intercept or endeavor to intercept (3) the contents of (4) an electronic communication (5) using a device.  The statute exempts any such intercepts if the defendant is a “party to the communication.”  Although the court ultimately affirmed dismissal of this count, some of its analysis may prove helpful to plaintiffs in the future.  First, the court held that the information acquired – the Universal Resource Locators (“URLs”) of websites the user had formerly visited – is “content” under the meaning of the Federal Wiretap Act.  In doing so, the court distinguished between URL addresses used to effectuate a communication – which previous case law viewed as “routing information” and, accordingly,  non-content – and URL addresses collected and used to show where a user had gone to before – which it viewed as content.  This is an important part of the decision, and one likely to be cited in the future by plaintiffs.  Ultimately, the court found that the exemption to the statute – where defendants are a “party to the communication” –  doomed the claim, because Google and the other defendants were intended recipients of the transmissions at issue.  The court rejected plaintiff’s argument that the exemption should not apply here because defendants used deceit to get the plaintiffs to voluntarily send information to them. 

Stored Communication Act  -- This statute bars intrusions on individual privacy arising from illicit access to “stored communications in remote computing operations and large data banks that stored e-mails.”  The Court of Appeals upheld dismissal of this count because the “facility” which was allegedly illicitly accessed – plaintiffs’ personal web browsers – does not meet the statute’s definition of a “facility through which an electronic communications service is provided.”  In doing so, the court agreed with the Ninth Circuit’s holding in In re: Zynga Privacy Litigation, 750 F.3d 1098, 1104 (9th Cir. 2014). 

Computer Fraud and Abuse Act The Third Circuit affirmed dismissal  of this count because plaintiffs could not meet the statutory requirement of “damage or loss.”  Although the court seemed willing to entertain the notion of a market for “internet history information,” it noted that there were no allegations that the plaintiffs had attempted to monetize their internet history information, which the court deemed a fatal blow.

California State Law Counts

California Constitution and Related Tort Claims: In reviving these claims, the court rejected Google’s contention that all that happened here was that the plaintiffs had “voluntarily sent Google all the internet usage information at issue” and that Google had then collected that information.  Calling this a “smokescreen,” the court focused on the surreptitious and deceptive nature of Google’s action:

What is notable about this case is how Google accomplished its tracking.  Allegedly, this was by overriding the plaintiffs’ cookie blockers, while concurrently announcing in its Privacy Policy that internet users could “reset your browser to refuse all cookies.”

2015 U.S. App. LEXIS 19581, * 55-56.  The court concluded: “users are entitled to deny consent, and they are entitled to rely on the public promises of the companies they deal with.”  Id. at * 58.

California Invasion of Privacy Act:  For the same reasons it dismissed the federal Wiretap law count – namely that Google was a party to the communication –  the Court of Appeals affirmed dismissal of this count as well.

California UCL Claim:  For the same reasons it dismissed the federal Computer Fraud and Abuse Act claim above – namely that plaintiffs could not show “damage or loss” – the Third Circuit upheld dismissal the UCL claim. 

Court in Cox Tying Case Overturns $6.3 Million Jury Verdict

Jason M. Bussey
Simpson Thacher

On November 12, 2015,  Judge Robin J. Cauthron of the Western District of Oklahoma granted defendant Cox Communications, Inc.’s (“Cox’s”) motion for judgment as a matter of law, holding that the jury in that case—which had found for the plaintiff on its tying claim following an eight day trial—lacked a legally sufficient evidentiary basis to do so.  In re Cox Enterprises, Inc. Set-Top Cable Television Box Antitrust Litig. (Healy), No. 12-2048 (W.D. Okla. Nov. 12, 2015).

The case involved Cox’s practice of renting set-top boxes (“STBs”) to digital cable subscribers for a monthly fee.  In 2009, Cox subscribers in various jurisdictions sued Cox on behalf of a putative nationwide class, claiming its rental practices violated Section 1 of the Sherman Act.  Specifically, plaintiffs alleged that Cox both conditioned the sale of its digital cable services on the customer’s rental of an STB and effectively precluded customers from renting or otherwise obtaining STBs from third parties.  As a result, they claimed, Cox tied its cable services to STB rentals, restrained competition in the STB market, and forced plaintiffs to pay more for STBs than they would absent the tie.

The initial lawsuits did not go to trial.  The Judicial Panel on Multidistrict Litigation transferred them to the Western District of Oklahoma where, after two years of discovery, the court declined to certify a nationwide class.  Cox, the court found, competed in many distinct markets across 19 states (including California), and the competitive conditions it faced, including the number and identity of its competitors, varied from market to market.  As a result, the plaintiffs could not establish market power or antitrust injury, both elements of their claim, with common proof.  In re Cox Enterprises, Inc. Set-Top Cable Television Box Antitrust Litig., No. 09-2018 (W.D. Okla. Dec. 28, 2011).

Counsel for the plaintiffs then re-filed many substantively identical lawsuits on behalf of separate classes, one for each distinct geographic market in which Cox competed.  These later cases were also consolidated and transferred to the Western District of Oklahoma.  Following consolidation, the parties agreed to stay every action besides Healy, which they denominated a “bellwether” case.  In Healy on January 2014, Judge Cauthron certified a class comprised of all persons in the Oklahoma City market who both subscribed to Cox residential premium cable and leased a Cox STB.  In re Cox Enterprises, Inc. Set-Top Cable Television Box Antitrust Litig., No. 12-2048 (W.D. Okla. Jan. 9, 2014). 

To prevail on his tying claim, the court held that Richard Healy, the lead plaintiff, had to establish five elements: (i) that digital cable and STBs are separate products; (ii) that Cox conditioned the sale of the former on a customer’s leasing of the latter; (iii) that in Oklahoma City Cox had enough power in the market for digital cable to restrain trade in the STB market; (iv) that the tying arrangement foreclosed substantial commerce to other actual or potential providers of STBs; and (v) damages.  Id. at 15.

The fourth element would ultimately prove dispositive, but not at summary judgment.  Cox there argued that no other company offered stand-alone STBs in the Oklahoma market, so even if it had tied its cable services to STB rentals, that arrangement could not have restrained competition.  Or, as the court characterized the argument, “there can be no illegal tie if no one else sold the tied product by itself.”  In re Cox Enterprises, Inc. Set-Top Cable Television Box Antitrust Litig., No. 12-2048, slip op. at 4 (July 3, 2014).  The court rejected this argument because a reasonable jury could find “it was Cox’s improper tying arrangement and anti-competitive conduct that precluded entry of any competitor in the [STB] marketplace.”  Id. at 4-5.  As a result of this ruling Cox could not effectively deny that STBs and cable services were separate products (element one); the court seemed sympathetic to the argument that access to premium cable was conditioned upon rental of a set-top-box—even though Cox did not officially require digital customers to rent its STBs (element two); and the narrow geographic definition of the relevant market made it difficult for Cox to argue it lacked significant economic power (element three).  

Following an eight day trial the jury returned a verdict for the plaintiffThe jury awarded $6.3 million (pre-trebling), far less than the $49 million plaintiff had sought.  Nevertheless, if the case was in fact a “bellwether,” the result portended substantial liability for Cox in other cases.  After trial, Healy’s trial counsel stated that the result had emboldened him to take Cox to trial in other markets and predicted the outcome would affect litigation against other cable providers.

In a renewed motion for judgment as a matter of law, the company returned to the fourth element: whether the tying arrangement foreclosed substantial commerce.  This time Cox argued not only that no other companies offered stand-alone STBs, but also (addressing the court’s concern at summary judgment) that nothing in the trial record suggested “anything Cox did [was] the reason” for that fact.  Def.’s Renewed Mot. J. L., No. 12-2048 at 4 (W.D. Okla. Oct. 29, 2015).  The plaintiff countered with evidence he said showed Cox discouraged customers from adopting CableCARD and Tru2Way, two technologies that allow subscribers to decrypt digital television signals without an STB; this conduct, he argued, may have dissuaded would-be STB manufacturers from entering the market.  Healy, slip op. at 3.  The plaintiff also noted that TiVo wished to, but ultimately did not, sell a retail STB.  Id.  Finally, he pointed to evidence that the Consumer Electronics Association “would like to see a robust two-way set-top box retail market” and that some companies were “interested in manufacturing boxes for retail.” Id. at 4.

The court found each argument unpersuasive.  There was no evidence from which a jury could conclude that a “manufacturer of set-top boxes refused to enter the market because of Defendant’s actions regarding CableCARd or Tru2Way.”  Id. at 3.  As for TiVo, the reason it never offered an STB was an indemnification issue with Motorola, not any conduct by Cox.  Although the plaintiff argued “[t]he jury could reasonably have found that this purported ‘indemnification issue’ was manufactured by Cox to prevent the TiVo deal from being completed,” that inference would have amounted to “unsupported speculation.”  Id.  Nor did the Consumer Electronics Association’s desire for a retail STB market establish causation, because “the evidence presented ended with a discussion of the desire—never was there any evidence [that] the desire was prevented or blocked by actions from Cox.”  Id. at 4.  Because no other company offered stand-alone STBs—through no fault of Cox—no reasonable jury could find that any tying arrangement by Cox “foreclosed a substantial volume of commerce in Oklahoma City.”  Id. at 2.  It followed necessarily that the plaintiff also could not establish  damages, the fifth element of his claim.

The larger impact of the case remains to be seen.  The plaintiff has filed a notice of appeal to the Tenth Circuit.  While similar lawsuits have been filed against Cox and other cable companies, it is unclear how many of those cases will actually be litigated in court.  Cable companies now routinely include mandatory arbitration provisions in their service contracts.  As a result of clauses inserted in 2011, Cox recently persuaded Judge Cauthron to compel the plaintiffs in two secondary cases—involving allegations substantively identical to those made by Healy—to arbitrate their claims.  Cox tried to compel Healy to arbitrate as well, but the court found, in an order the Tenth Circuit has since affirmed, that it waited too long to file its motion. 

Antitrust Case Against Golden State Warriors and Ticketmaster Dismissed for Failure to Allege a Cognizable Relevant Product Market

Robert Freitas and Rachel Kinney
Freitas Angell & Weinberg LLP

In StubHub, Inc v. Golden State Warriors, LLC, No. 15-1436, 2015 WL 6755594 (N.D. Cal. Nov. 5, 2015), ticket reseller StubHub asserted five federal claims and three state claims against the Golden State Warriors and Ticketmaster. StubHub alleged that the defendants violated Section 1 of the Sherman Act by engaging in: (1) illegal tying “by mandating that persons who purchase primary Warriors tickets cannot resell them other than through Ticketmaster,” (2) “a series of coordinated agreements and acts to limit competition;” and (3) exclusive dealing. 2015 WL 6755594, at *2. StubHub also alleged that the defendants violated Section 2 of the Sherman Act “by entering into a conspiracy to monopolize the Secondary Ticket Services Market” and “by attempting to monopolize the Secondary Ticket Services Market.” Id. The state law claims alleged violations of the Cartwright Act and Business and Professions Code Section 17200, and interference with prospective economic advantage. Id. at *4.

Judge Maxine Chesney dismissed StubHub’s first amended complaint in its entirety, finding that StubHub’s proposed product markets—a “Primary Ticket Market” for the sale of Warriors tickets to games played at Oracle Arena and a “Secondary Ticket Services Market” for the sale of Secondary Ticket Exchange services for Warriors tickets to games played at Oracle Arena—“are not cognizable as a matter of law[] as neither encompass[es] all interchangeable substitute products.” Id. at *3. Judge Chesney further found that the “Primary Ticket Market” fails for the additional reason that “the natural monopoly every manufacturer has in the production and sale of its own product cannot be the basis for antitrust liability.” Id. at *4. The court dismissed StubHub’s Sherman Act and Cartwright Act claims and declined to exercise supplemental jurisdiction over the remaining state law claims. Id. at *4-5.

On December 1, 2015. StubHub filed a notice of appeal, Ninth Circuit Court of Appeals Case Number 15-17362.

From the November 2015 E-Brief

Ninth Circuit Affirms District Court’s Judgment that NCAA Violated Section 1 of the Sherman Act, Rejects Payments to Athletes

Gabe Zeldin
Steyer Lowenthal Boodrookas Alvarez & Smith LLP

On September 30, 2015, the Ninth Circuit issued a split decision in O’Bannon v. NCAA, ___ F.3d ___, 2015 WL 5712106 (9th Cir. 2015), holding that the National Collegiate Athletic Association (“NCAA”) violated Section 1 of the Sherman Act by prohibiting current and former FBS football and Division I men’s basketball players from receiving compensation for the use of their names, images and likenesses (“NILs”).

After a highly-publicized three week bench trial in the Northern District of California, Judge Wilken entered judgment for the plaintiffs (who only sought injunctive relief), applying a three step Rule of Reason analysis and holding that (1) the NCAA’s rules had an anticompetitive effect in the college education market, Id. at *4; (2) the NCAA correctly identified two pro-competitive justifications – preserving “amateurism” in college sports and integrating academics and athletics, Id. at *6; and (3) plaintiffs supported two less-restrictive alternatives for achieving those justifications: allowing schools to award stipends up to the full costs of attendance, and permitting schools to hold up to $5,000 per year of NIL revenues in trust to be distributed in equal shares after student athletes leave college. Id. at *9. The NCAA appealed to the Ninth Circuit.

The Ninth Circuit, in an opinion authored by Judge Bybee and joined by Judge Quist (sitting by designation), held that “the district court’s decision was largely correct” and affirmed on liability. The Ninth Circuit also affirmed the holding that the NCAA could not prohibit schools from paying student athletes the full cost of attendance, but reversed the district court’s prohibition of the NCAA’s rules banning deferred compensation trusts of NIL revenue. Id. at *1. The Ninth Circuit rejected three NCAA arguments that the court should not reach the merits. First, the Ninth Circuit recognized the United States Supreme Court’s dicta in NCAA v. Bd. of Regents of the Univ. of Okla., 468 U.S. 85 (1984) that the NCAA needs “ample latitude” to maintain amateurism in college sports and that “preservation of the student-athlete … is entirely consistent with the goals of the Sherman Act,” but held that Board of Regents merely instructed that “no NCAA rule should be invalidated without a Rule of Reason analysis.” O’Bannon, 2015 WL 5712106, at *12.

Second, the Ninth Circuit rejected as “not credible” the NCAA’s position that eligibility rules do not regulate commercial activity, because “it is undeniable” that athletic recruits and Division I schools who exchange labor and NIL rights for a scholarship “anticipate economic gain” from the transaction. Id. at *13. Third, the Ninth Circuit held that plaintiffs were injured in fact by the NCAA’s rules foreclosing the market for NILs in video games, and that the Copyright Act’s supposed preemption of any rights of publicity was irrelevant because “there is every reason to believe that, if permitted to do so, EA or another video game company would pay NCAA athletes for their NIL rights rather than test the enforceability of those rights in court.” Id. at *14-15, 17.

Turning to the merits, the Ninth Circuit applied a three-part Rule of Reason test and described how the burden of proof shifts with each step: “(1) The plaintiff bears the initial burden of showing that the restraint produces significant anticompetitive effects within a relevant market. (2) If the plaintiff meets this burden, the defendant must come forward with evidence of the restraint’s procompetitive effects. (3) The plaintiff must then show that any legitimate objectives can be achieved in a substantially less restrictive manner.” Id. at *18 (quoting Tanaka v. Univ. of S. Cal., 252 F.3d 1059, 1063 (9th Cir. 2001)).

Applying the first step, the Ninth Circuit determined that the district court’s findings regarding anticompetitive effects of the NCAA’s restraint “have substantial support in the record” because “an antitrust court should not dismiss an anticompetitive price-fixing agreement as benign simply because the agreement relates only to one component of an overall price.” Id. at * 20.

Discussing the NCAA’s burden in the second step, the Ninth Circuit “accepted the district court’s factual findings that the compensation rules do not promote competitive balance, that they do not increase output in the college education market, and that they play a limited role in integrating student-athletes with their schools’ academic communities” and focused on the NCAA’s purported justification that its “rules promote amateurism, which in turn plays a role in increasing consumer demand for college sports.” Id. at *20. The Ninth Circuit agreed that the NCAA’s compensation rules serve the procompetitive purpose of “preserving the popularity of the NCAA’s product by promoting its current understanding of amateurism.” Id. at *21.

Last, the Ninth Circuit evaluated the district court’s less-restrictive alternatives, explaining that “to be viable under the Rule of Reason,” plaintiffs must “make a strong evidentiary showing” that its alternatives are “‘virtually as effective’ in serving the procompetitive purposes of the NCAA’s current rules, and ‘without significantly increased cost.’” Id. at *22. The Ninth Circuit agreed with the district court that full cost of attendance grants-in-aid were a viable less restrictive alternative, cautioning that its holding established “only that where, as here a restraint is patently and inexplicably stricter than is necessary to accomplish all of its procompetitive objectives, an antitrust court can and should invalidate it.” Id. at *24 (emphasis in original). The majority identified clear error, however, “in finding it a viable alternative to allow students to receive NIL cash payments untethered to their education expenses.” Id. The majority vacated that portion of the district court’s order, finding that the evidence was “simply not enough to support the district court’s far-reaching conclusion that paying student athletes $5,000 per year will be as effective in preserving amateurism as the NCAA’s current policy.” Id. at *25.

Judge Thomas concurred in part and dissented in part, concurring with the majority in all aspects except for its decision to vacate the portion of the order permitting $5,000 per year in deferred compensation. Judge Thomas deferred to the district court’s factual findings crediting the testimony from at least four experts, the NCAA’s authorization of student athletes to accept Pell grants, and the fact that Division I tennis recruits may earn up to $10,000 per year in prize money before enrolling in college. Id. at *27. Judge Thomas explained that the majority applied the wrong standard of review by improperly weighing the evidence, and disagreed with the majority’s decision to frame the third step of the Rule of Reason test as a question of whether the NCAA’s rules were virtually as effective in preserving amateurism, instead of evaluating the effectiveness of preserving popular demand for college sports. Id. at *28-29. Plaintiffs petitioned for an en banc review of the Ninth Circuit’s application of the third Rule of Reason step, and the Ninth Circuit ordered the NCAA to respond by November 16, 2015.

Sutter Health Loses Appeal to Arbitrate Cartwright Act and UCL Claims

Elizabeth C. Pritzker
Pritzker Levine LLP

On October 27, 2015, the California Court of Appeals for the First Appellate District affirmed a trial court order denying a motion by Sutter Health to compel a union’s benefits trust to arbitrate a class action under the Cartwright Act and Unfair Competition Law alleging that Sutter engaged in anti-competitive behavior that increased health costs for thousands of workers. UFCW and Employers Benefit Trust v. Sutter Health (2015) ___ Cal.App.4th ___ (2015).

United Food and Commercial Workers & Employers Benefit Trust (UEBT) filed a putative class action on behalf of itself and a class of all other California self-funded payors who have paid Sutter, claiming that the terms of provider contracts Sutter enters with network vendors violate the Cartwright Act and the UCL, causing class members to overpay for Sutter’s services.

Specifically, UEBT alleges that Sutter demands inclusion of anticompetitive terms, including prohibiting disclosure of hospital pricing information, prohibiting efforts to encourage patients to select the most cost-effective providers, and requiring network vendors to include all of Sutter’s hospitals and facilities in their networks. According the UEBT, through this alleged anticompetitive conduct, in combination with “punitively high [o]ut-[o]-[n]etwork [h]ospital [c]hargemaster pricing,” Sutter forecloses price competition, allowing it to charge inflated prices that substantially exceed the prices charged by other local hospitals. UEBT seeks damages, restitution, and declaratory and injunctive relief prohibiting Sutter’s anticompetitive conduct. Sutter Health, __ Cal. App. 4th at __. [Slip Opn., at 5.]

Sutter moved to compel arbitration of UEBT’s complaint. The basis for Sutter’s motion is its Provider Contract with Blue Shield. This contract includes an arbitration clause as well as a provision that required Blue Shield to assure that other payors agreed to be bound by the arbitration clause and maintained the agreement in strictest confidence. Two years after Sutter had entered into this contract with Blue Shield, UEBT separately contracted with Blue Shield to utilized Blue Shield's provider network and obtain administrative services (ASO contract). The ASO contract expressly provided, however, that it did not create any contractual relationship between UEBT and contracted providers. It further provided that nothing in the agreement would be construed as a sale, lease or transfer to UEBT of any agreement or contract between Blue Shield and any contracting provider. Sutter and Blue Shield later amended the dispute resolution provision of their Provider Contract so that it expressly applied to “all disputes” between Sutter and any ASO Payor. Sutter maintained that UEBT, while not a signatory to the Provider Contract, was nonetheless bound by this amendment.

The First Appellate District affirmed the trial court’s order denying Sutter’s motion to compel. The Court held that UEBT is not bound to arbitrate its claims “pursuant to an agreement [the Provider Agreement] it had not signed or even seen.” Sutter Health, __ Cal.App. 4th at __. [Slip Opn. at 2].

In support of its motion to compel arbitration, Sutter also cited the Health Care Providers’ Bill of Rights, specifically Cal. Health & Safety Code § 1375.7(d), which states that the rights and obligations of health care providers shall be governed by the underlying contract between the provider and a contracting agent. The First Appellate District again agreed with the trial court, concluding that this section of California law does not regulate the payor but instead protects health care providers from being compelled to adhere to contract provisions they didn’t agree to.

However, here, the Legislature has not indicated any intent to alter the obligations of third party payors, like UEBT, either in the plain language or legislative history of section 1375.7, subdivision (d). Nor has it delegated the power to bind such third party payors to contracting agents, such as Blue Shield. UEBT cannot be deemed to have agreed to arbitrate by virtue of the statute.

Sutter Health, ___ Cal.App.4th at __. [Slip Opn., at 19.]

The First Appellate District likewise rejected Sutter’s common law theory of equitable estoppel. The court found that UEBT did not seek to enforce the terms or obligations of the Provider Contract, while at the same time seeking to avoid arbitration. UEBT also did not otherwise “accept the benefits” of the Provider Contract, the court held. Sutter Health, __ Cal.App.4th at __. [Slip Opn. at 22-23].

The First Appellate District also rejected Sutter’s theory that Blue Shield was acting at UEBT’s agent in contract negotiations, such that UEBT may be deemed to be bound by the amendment of the Sutter-Blue Shield Provider Contract requiring that “all disputes” between Sutter and an ASO Payor be resolved through arbitration. “We fail to see how UEBT members’ use of Blue Shield cards to obtain services from Sutter providers reasonably suggests that UEBT has authorized Blue Shield to bind UEBT to all terms of the Provider Contract,” the court held. Sutter Health, __ Cal. App. 4th __ [Slip Opn. at 24].

From the October 2015 E-Brief

Ninth Circuit Affirms Finding that NCAA Rules are Anticompetitive and Upholds One Alternative Provided by District Court While Striking Down Second Alternative

Steve Williams
Cotchett, Pitre & McCarthy, LLP

On September 30, 2015, the Ninth Circuit Court of Appeals in O'Bannon v. National Collegiate Athletic Association, ___ F.3d. ____, 2015 U.S. App. LEXIS 17193 (9th Cir. 2015) affirmed that the NCAA is subject to antitrust scrutiny and that under a Rule of Reason analysis, the NCAA's rules prohibiting member schools from covering the full cost of attendance for student-athletes were anticompetitive because they "fixed" the price that recruits pay to attend college. The Ninth Circuit held that the District Court had identified a legitimate less restrictive alternative to the NCAA's rules, i.e., permitting member schools to give scholarships up to the full cost of attendance, but that the District Court's other alternative allowing students to be paid up to $5,000 per year was erroneous. The O'Bannon trial will be featured at this year's GSI, and the Ninth Circuit's decision will be given a more extensive analysis in the November e-brief.

Ninth Circuit Rules That Differences In Damage Calculations Do Not Defeat Class Certification Even After Comcast

Elizabeth C. Pritzker
Pritzker Levine LLP

On September 21, 2015, the Ninth Circuit Court of Appeals in Pulaski and Middlemen, LLC v. Google, Inc., ___ F.3d __, 2015 WL 5515617 (9th Cir. 2015), held that individualized damage calculations will not defeat class certification in cases brought under the California Unfair Competition Law and False Advertising Law. This is an important decision for class action practitioners, because it clarifies the Ninth Circuit rule, as articulated in Yokoyama v. Midland National Life Ins. Co., 594 F.3d 1087, 1094 (9th Cir. 2010), that mere differences in damages calculations among putative class members are not sufficient to defeat class certification.

In Pulaski, the Ninth Circuit wrote: "Yokoyama remains the law of this court, even after Comcast [Corp. v. Behrand, __ U.S. __, 133 S. Ct. 1426, 185 L.Ed.2d 515 (2013)]. Id, 2015 WL 5515617 at *7. "Because '[d]amages calculations alone ... cannot defeat certification' under Yokoyama," the Ninth Circuit held, "the district court erred in concluding that Yokoyama 'does not apply to the facts here.' Thus, it abused its discretion in denying class certification on this basis. See Yokoyama, 594 F.3d at 1090-92." Id (footnote omitted, internal quotation marks, parentheses and ellipse in original).

The plaintiffs in Pulaski filed a putative class action against Google, Inc., alleging that Google misled them both as to the nature and cost of the Google Adwords program. Adwords is an auction-based program through which advertisers bid for Google to place their advertisements on websites. Advertisers pay a particular price (which is determined using various criteria and formulas) each time an Internet user "clicks" on their display ad. Advertisers may select among various categories of websites (Search Feed sites, Content Network sites, or both) on which their ads would appear. Ads would appear on these sites if the ad's keywords matched those of the website. Pulaski, 2015 WL 5515617 at *1.

As alleged by Plaintiffs, there were other categories of sites that did not appear in the Google Adwords registration process: parked domain sites and error pages. Parked domain sites are undeveloped domains that contain no content. Error pages appear when a user inputs an unregistered web address. Thus, without Plaintiffs' knowledge, Adwords ads appeared on parked domains and error pages, both of which were meaningless for advertisement purposes, and plaintiffs were charged for clicks on advertisements appearing on these websites. Pulaski, 2015 WL 5515617 at *2.

Plaintiffs filed a putative class action against Google, alleging that it misled advertisers in violation of California's Unfair Competition Law ("UCL"), Cal. Bus.

& Prof. Code § 17200 et seq., and California's False Advertising Law ("FAL"), § 17500 et seq., by failing to disclose the placement of Adwords ads on parked domains and error pages. Plaintiffs' complaint sought restitution for a putative class of "persons or entities located within the United States who, from July 11, 2004 through March 31, 2008 ...who had an Adwords account with Google and were charged for clicks on advertisements appearing on parked domain and/or error page websites." Pulaski, 2015 WL 5515617 at *2.

Plaintiffs moved for class certification pursuant to Rule 23 for a Rule 23(b) class. In support of their motion, Plaintiffs proposed three different methods for calculating restitution, all of which were based on a "but for" or "out-of-pocket loss" calculation: that is, the difference between what advertisers actually paid Google and what they would have paid had Google informed them that their ads were being placed on parked domains and error pages. Although the methods differed in the way they calculated restitution, because some methods worked better than others for certain subsets of class members, Plaintiffs presented the methods as possibly complementary. Pulaski, 2015 WL 5515617 at *2.

The District Court (the Hon. Edward Davila) found the class proposed by the Plaintiffs satisfied all of the criteria of Rule 23(a): numerosity, commonality, typicality, and adequate representation. Pulaski, 2015 WL 5515617 at *3. Turning next to the predominance inquiry under Rule 23(b), the District Court found that, even assuming the plaintiff class could prevail on liability, common questions did not predominate on the issues of class members' entitlement to restitution and amount of restitution due ach class member. Id. Judge Davila expressed concern that "the question of which advertisers among the hundreds of thousands of proposed class members" may be "entitled to restitution would require individual inquiries." Id. The court also was concerned that individual questions may arise in determining the amount of restitution owed to the class and individual class members. Id. Concluding that individualized questions predominated on the issue of restitution, Judge Davila denied the motion for class certification. Plaintiffs moved for reconsideration, which the District Court also denied. Id.

The Ninth Circuit reversed the District Court on both grounds. First, it disagreed with Judge Davila's conclusion that determining entitlement to relief under the UCL or FAL would require individualized inquiry, concluding that the central inquiry for liability in class cases based on false advertising or promotional practices--proof of "whether members of the public are likely to be deceived"--is the same for each member of the class. "Thus," the Ninth Circuit held, "a court need not make individualized determinations regarding entitlement to restitution. Instead, restitution is available on a classwide basis once the class representative makes the threshold showing of liability under the UCL and FAL. Accordingly, the district court erred in holding that such individual questions would predominate." Pulaski, 2015 WL 5515617 at *5.

Second, the Ninth Circuit disagreed with the District Court's conclusion that is was not bound by Yokoyama's holding that "damage calculations alone cannot defeat certification." Pulaski, 2015 WL 5515617 at *5. In doing so, the Ninth Circuit rejected Google's argument that the Supreme Court's decision in Comcast called Yokoyama's holding into question. "Since Comcast," the Panel wrote, "we have continued to apply Yokoyama's central holding." Id at *6. "We reaffirmed the proposition that differences in damage calculations do not defeat class certification after Comcast in Jimenez v. Allstate Insurance Co., 765 F.3d 1161, 1167 (9th Cir. 2014) [internal citations omitted]. As we explained, our sister circuits have adopted '[s]imilar positions' since Comcast. See id. at 1167-68 (citing cases from the Sixth, Seventh and Fifth Circuits, as well as Leyva [v. Medline Industries, Inc., 716 F.3d 510, 513-14 (9th Cir. 2013)] and Yokoyama." Id.

"In sum, Yokoyama remains the law of this court, even after Comcast. Because '[d]amages calculations alone ... cannot defeat certification' under Yokoyama," the decision continues, "the district court erred in concluding that Yokoyama 'does not apply to the facts here.'" Pulaski, 2015 WL 5515617 at *7.

The Ninth Circuit also rejected arguments by Google that the Plaintiffs' proposed method for calculating restitution was "arbitrary" and thus does not satisfy Rule 23(b)(3)'s predominance requirement or Comcast. Importantly, the Ninth Circuit held classwide damages calculations need not be certain or exacting to satisfy Rule 23(b)(3)'s mandates. "In calculating damages, here restitution," the Ninth Circuit held, "California law 'requires only that some reasonable basis for computation of damages may be used, and the damages may be computed even if the result is an approximation.' Marsu, B.V. v. Walt Disney Co., 185 F.3d 932-983-89 (9th Cir. 1999). '[T]he fact that the amount of damage may not be susceptible of exact proof or may be uncertain, contingent or difficult of ascertainment does not bar recovery.' Id. at 939." Pulaski, 2015 WL 5515617 at *7.

California Attorney General Opinion 15-402 Establishes Standard for Active State Supervision and State Action Immunity Defense

Steve Williams
Cotchett, Pitre & McCarthy, LLP

In Opinion of Kamala D. Harris No. 15-402 (September 10, 2015). the California Attorney General answered the question presented by the Hon. Jerry Hill "What constitutes 'active state supervision' of a state licensing board for purposes of the state action immunity doctrine in antitrust actions, and what measures might be taken to guard against antitrust liability for board members?"

"'Active state supervision' requires a state official to review the substance of a regulatory decision made by a state licensing board, in order to determine whether the decision actually furthers a clearly articulated state policy to displace competition with regulation in a particular market. The official reviewing the decision must not be an active member of the market being regulated, and must have and exercise the power to approve, modify, or disapprove the decision. Measures that might be taken to guard against antitrust liability for board members include changing the composition of boards, adding lines of supervision by state officials, and providing board members with legal indemnification and antitrust training."

The question and the Attorney General's response were precipitated by North Carolina State Board of Dental Examiners v. Federal Trade Commission (2015) ___ U.S. ____, 135 S. Ct. 1101 ("North Carolina Dental"), which established a new standard for determining whether a state licensing board is entitled to immunity from antitrust actions. Prior to North Carolina Dental, most state licensing boards operated under the assumption that they were immune from antitrust suits under the state action doctrine.

The North Carolina Dental Board was established by North Carolina law and charged with administering a system for licensing dentists and regulating the practice of dentistry but did not specify whether teeth whitening was part of dentistry. A majority of the members of the Board were practicing dentists. After North Carolina dentists complained to the Board that non-dentists were offering teeth whitening services, the Board issued cease-and-desist letters to several teeth whitening businesses and to the owners of commercial property where teeth whitening businesses were operating. These actions had a severe effect on the teeth whitening business, and the Federal Trade Commission filed suit challenging the Board's conduct. The Board claimed that the state action doctrine protected its conduct. The Supreme Court disagreed, holding that a state board on which a controlling number of decision makers are active market participants must show that it is subject to "active state supervision" in order to claim immunity.

The Attorney General reviewed the standards for invocation of the state action doctrine for private parties acting on behalf of a state as established in Parker v. Brown (1943) 317 U.S. 341, which provides immunity when (1) their conduct is undertaken pursuant to a "clearly articulated" and "affirmatively expressed" state policy to displace competition and (2) their conduct is "actively supervised" by the state, and that after North Carolina Dental this standard applies to state boards controlled by active market participants.

The Attorney General identified four "'constant requirements of active supervision': (1) the state supervisor who reviews a decision must have the power to reverse or modify the decision; (2) the 'mere potential' for supervision is not an adequate substitute for supervision; (3) when a state supervisor reviews a decision, he or she must review the substance of the decision, not just the procedures followed to reach it; and (4) the state supervisor must not be an active market participant."

The Opinion then reviewed steps that the Legislature could take to provide the framework for the invocation of the state action doctrine after North Carolina Dental, first noting that there were compelling reasons why market participants' membership on boards furthered state goals, e.g., that doctors are best suited to determine standards applicable to doctors. For this reason, simply increasing public membership on boards was not seen as a meaningful solution for the desire to provide immunity to state boards.

Turning to the question of what might constitute appropriate active state supervision for purposes of immunity, the Opinion suggested the possible use of "superagencies" which would apply de novo review to the actions of subordinate boards, or modification of the powers of boards so that they would provide advisory opinions that might then be submitted to a supervising state agency for review and approval. It noted that the current organizational configuration of most professional boards under the purview of the Department of Justice's Consumer Law Division, a Division whose sole interest is in protecting consumers' interests, might make the process of bringing boards into compliance in California relatively easy. The opinion also described procedural rules that would govern under these proposals to insure that adequate records were developed reflecting board proposals, to avoid duplication and waste, to insure that decision making was sufficiently tailored to the markets at issue, and to avoid leaving supervising state agencies simply "rubber stamping" subordinate boards' decisions.

The Opinion concluded that present state law provides for the indemnification of board members facing antitrust claims, but that, while this protection should reassure board members that they will not be exposed to undue risk if they act reasonably and in good faith, it does not provide complete comfort from the risk of litigation and treble damage claims, particularly given the lack of certainty as to whether treble damage claims under the antitrust laws are equivalent to punitive damages and thus potentially not subject to indemnity. The Opinion suggested that state law be amended to make clear that antitrust treble damages specifically be excluded from the definition of punitive damages within the meaning of the Government Code and went on to argue that the purpose of treble damages for antitrust claims is never furthered when such awards come from public funds, as would be the case where the state is indemnifying a board member.

Finally, the Opinion suggested introducing antitrust concepts to the training required of board members.

From the September 2015 E-Brief

Privacy Violations Are a UCL Issue, Third Circuit Rules

Thomas N. Dahdouh
Regional Director, Western Region, FTC*

*Views expressed herein are solely and completely the personal views of the author only and do not necessarily reflect those of the Commission or any Commissioner.

In a long-awaited ruling, the Third Circuit upheld a district court determination that a Federal Trade Commission ("FTC") challenge to allegedly lax data security practices at Wyndham's hotels could go forward as an "unfair practice" that violates Section 5 of the Federal Trade Commission Act. Federal Trade Commission v. Wyndham Worldwide Corp., 2015 U.S. LEXIS 14839 (3rd Cir., August 24, 2015). The FTC Act is the federal flavor of California's Unfair Competition Law. While this decision solely focused on Section 5 of the FTC Act, it is likely to breathe renewed vigor into efforts by federal, state and local law enforcement agencies as well as the private bar to challenge deceptive and unfair privacy practices.

In 2008 and 2009, hackers successfully accessed Wyndham's computer systems. In total, they stole personal and financial information for 619,000 customers, according to the FTC complaint. The FTC filed suit in June 2012, alleging that Wyndham engaged in unfair security practices that unreasonably and unnecessarily exposed consumers' personal data to unauthorized access and theft. 2015 U.S. App. LEXIS 14389, * 5. Among other things, the FTC alleged that the company failed to use firewalls at critical network points, did not restrict specific IP addresses, did not use encryption for certain customer files, and did not require some users to change their default or factory-setting passwords. Id. at * 53.

In affirming the district court's decision to let the case proceed, the appellate court rejected several contentions by Wyndham. The first basket of challenges relate to the meaning of unfairness, the second batch to subsequent congressional action and the third concerned whether Wyndham had adequate notice that its conduct could violate the FTC Act.

The Meaning of Unfairness

First, Wyndham alleged that the plain meaning of the term "unfair" required a showing of further evidence beyond the "three-part" test that the FTC has used since it issued its FTC Unfairness Policy Statement in 1980. A little background is in order here. As codified by Congress in Section 5(n) of the FTC Act in 1994, a finding of unfairness requires that the FTC show that (1) the act or practice causes or is likely to cause substantially injury to consumers (2) which is not reasonably avoidable by consumers themselves and (3) which is not outweighed by countervailing benefits to consumers or competition. This provision also bars the agency from "primarily" relying on public policy considerations as the basis for a determination that a practice is unfair. Wyndham referenced back to Supreme Court case law from the 1920's to argue that a finding of unfairness also required "unscrupulous or unethical behavior," but the Court noted that subsequent Supreme Court precedent, FTC v. Sperry & Hutchinson Co., 405 U.S. 233, 244 n.5 (1972), rejected that additional requirement.

Next, Wyndham argued that the dictionary definition of "unfair" required that the practice be "not equitable" or "marked by injustice, partiality, or deception." The court dismissed this argument because it found that, at this stage of the litigation, the FTC had met such a test. In particular, the court focused on how difficult it would be for consumers to reasonably avoid Wyndham's unreasonable data security because the company's privacy policy deceptively overstated its cybersecurity. Id., * 18-22. Importantly, though, the court left for another day the possibility that unfairness could be shown in a data breach situation even absent a privacy policy that overstated cybersecurity protections. Id., * 20 n. 5.

The court also rejected the claim that unfairness could not be shown here because the direct cause of the harm were hacks by third parties and thus that Wyndham did not directly cause the harm to consumers. Id., * 20-21. In this regard, the court importantly focused on the fact that actual harm is not necessary to make out a claim of unfairness: rather, the standard for unfairness is whether there was an increased likelihood of harm to consumers as a result of the practice in question. The court found a cybersecurity intrusion to be a likely plausible result of the allegedly lax security, and the allegedly lax security to be the most proximate cause of that likely injury. Id., * 21.

Finally, the court rejected Wyndham's final argument that giving the FTC authority over lax security practices could lead to FTC liability for poor security or lax clean-up procedures at brick-and-mortar retail establishments. In colorful language, Wyndham's lawyers had argued that even a "banana peel" left on a shopfloor could lead to FTC liability. The court's "tart" response was that, "were Wyndham a supermarket, leaving so many banana peels all over the place that 619,000 customers fall hardly suggests it should be immune from liability" here. Id., * 22.

Subsequent Congressional Action and FTC Agency Inaction

Wyndham next argued that subsequent legislative acts excluded consumer privacy violations from the scope of Section 5 of the FTC Act. Wyndham noted that three separate direct actions by Congress gave the Federal Trade Commission the authority to promulgate regulations in the privacy arena: 2003 amendments to the Fair Credit Reporting Act gave the FTC the ability to develop regulations for the proper disposal of consumer data; the 1999 Gramm-Leach-Bliley Act required the FTC to establish standards for financial institutions to protect consumers' personal information; and the Children's Online Privacy Protection Act similarly gave the FTC authority to promulgate regulations concerning children's websites. Wyndham cited FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120 (2000), for the proposition that these later Congressional actions evinced a Congressional conclusion that the FTC did not in fact have authority over cybersecurity. The court disagreed, finding that all these laws either required action (rather than simply gave authority) or gave FTC greater leeway than it already had under Section 5 to take action. In other words, none of these legislative actions was "inexplicable" if the FTC already had some authority over privacy violations under Section 5. Id., * 22-28. The court also found unpersuasive the claim that the FTC had somehow disclaimed its authority over lax security practices in statements made to Congress.

Fair Notice

Wyndham's final argument was that the FTC failed to give fair notice of the specific cybersecurity standards the company was required to follow. The Court appeared puzzled by Wyndham's shifting legal arguments on what type of notice it was entitled to here, noting seven different shifting positions Wyndham took on appeal. The Court concluded that Wyndham was not entitled to know with "ascertainable certainty" the FTC's interpretation of what cybersecurity practices were required to meet Section 5, but only rather whether Wyndham had the "relatively low level" of "fair notice" of the meaning of Section 5 in this context. In the context of cybersecurity, the court found that fair notice here is satisfied "as long as the company can reasonably foresee that a court could construe its conduct as falling within the meaning of the statute." Id., * 46. The court found the FTC met this requirement handily, given public pronouncements and settlements it has entered into with companies engaged in lax data security practices.

D.C. Circuit Revives ATM Fee Antitrust Litigation

Bethany Caracuzzo
Pritzker Levine LLP

On August 4, 2015, the United States Court of Appeals for the District of Columbia Circuit revived litigation over whether Visa, MasterCard, and several other U.S. banks conspired to inflate ATM fees by imposing "Access Fee Rules" that act to insulate defendants from price competition over access fees. This decision arose out of a consolidated appeal of three District Court decisions dismissing separate but related civil actions brought by consumers and independent non-bank ATM operators. The D.C. Circuit held that the District Court erred in dismissing plaintiffs' cases on the ground that plaintiffs lacked standing and had failed to plead adequate facts in support of a conspiracy. Osborn, et al. v. Visa Inc., et al., No. 14-7004, 2015 WL 4619874 (D.C. Circuit, August 4, 2015).

All ATM providers, including non-bank "independent" providers, must use an ATM network to connect to a cardholder's bank; the most popular networks are those operated by Visa (the Plus, Interlink, and VisaNet networks) and MasterCard (the Cirrus and Maestro networks). Competing networks include NYCE and Star. Network service providers charge fees for use of their networks. Independent ATM operators make money in two ways: first, by charging a "net interchange fee", a fee paid by the cardholder's bank to the ATM operator less any network services fee charged by the network provider, and second, by collecting ATM "access fees" paid by the cardholder per transaction. MasterCard and Visa generally charge the highest network service fees, which means that independent operators make the least money on transactions via their networks.

Visa and MasterCard each impose, as a condition for ATM operators to access their networks, "Access Fee Rules" which provide that no ATM operator may charge customers whose transactions are processed through Visa or MasterCard networks a greater access fee than that charged using any other network, meaning, for example, that operators cannot offer to charge cardholders a $1.74 fee for using a Star network card if the provider is charging a $2.00 fee for using a Visa network card. Plaintiffs allege that these Access Fee Rules illegally restrain competition by preventing independent ATM operators from offering differential pricing to incentivize cardholders to use cards using networks other than those operated by Visa or MasterCard. Osborn, 2015 WL 4619874, at *2, *5. But for these Rules, plaintiffs allege, ATM operators could offer discounted access fees that would drive all fees downward. Id., at *5.

On February 12, 2013 the District Court held that plaintiffs could not allege facts to establish standing or, in the alternative, lacked sufficient facts to establish concerted activity under Section 1 of the Sherman Act. Nat'l ATM Council, Inc. v. Visa Inc., 922 F.Supp.2d 73 (D.D.C. 2013) ("NAC I"). In a procedural twist, the District Court dismissed not just the complaints, but the cases without prejudice, resulting in plaintiffs moving the District Court pursuant to Rule 59(e) to modify its judgment to a dismissal of the complaints, not cases, while simultaneously submitting proposed amended complaints. These motions also were denied by the District Court, on the ground that the amendments would be futile. See Nat'l ATM Council, Inc. v. Visa Inc., 7 F. Supp. 3d 51 (D.D.C. 2013) ("NAC II").

In dismissing the cases, the District Court reasoned that plaintiffs lacked standing because their allegations relied on an "attenuated, speculative chain of events [] that relies on numerous independent actors…" NAC II, 7. F.Supp.3d at 60. The D.C. Circuit disagreed, and found that two distinct theories of injury were sufficiently alleged by plaintiffs: first, that the independent operators' cut was minimized by MasterCard and Visa working in concert and with impunity to maximize their own returns from transactions, and, second, that consumers pay inflated fees at ATMs because the Access Fee Rules inhibit competition in both the network service market and in the access fees market, and that these theories "are susceptible to proof at trial." Osborn, 2015 WL 4619874, at *5, *6. The D.C. Circuit also noted that the District Court's decision relied on cases that had been decided at summary judgment, which was not an appropriate analysis for a Rule 12(b)(1) motion. Id., at *6-*7.

As to whether plaintiffs had sufficiently pleaded an agreement in violation of the Sherman Act, the D.C. Circuit also overturned the District Court opinion, concluding that plaintiffs had adequately alleged a horizontal agreement to restrain trade, and ruling that the fact that the Access Fee Rules were adopted by Visa and MasterCard as single entities does not preclude a finding of concerted action. Id., at *7. The Court also rejected defendants' arguments that they were merely members in the bankcard associations and that mere membership does not confer liability, and similarly rejected arguments that the reorganization of the banks as publicly held corporations constituted their withdrawal from the conspiracy, noting that the Rules remained intact post-reorganization and that withdrawal was a question of fact for the jury to decide. Id., at *8-*9.

The D.C. Circuit vacated the District Court's December 19, 2013 order denying the plaintiffs' motion to amend the judgment and remanded for further proceedings. In a footnote, the court noted that, as futility was the sole ground articulated for denying plaintiffs' motion to amend the judgment and file amended complaints, it saw "no reason that the motions [to amend] should not be granted on remand" but left this discretionary decision to the district judge. Id., at *10, n. 4.

Seventh Circuit Rejects Third Circuit's "Heightened Ascertainability" Framework

Elizabeth C. Pritzker
Pritzker Levine LLP

On July 28, 2015, the Seventh Circuit Court of Appeals in Mullins v. Direct Digital, LLC, ___ F.3d ___, 2015 U.S. App. LEXIS 13071 (7th Cir. 2015) ("Mullins"), scrutinized the Third Circuit's controversial requirement of a "reliable and administratively feasible" way to identify class membership – and wholly rejected it. According to Circuit Judge Hamilton and his panel colleagues, Judges William Bauer and Michael Kanne, the Third Circuit's 2013 ruling in Carrera v. Bayer Corp., 727 F.3d 300 (3d. Cir. 2013) upsets Rule 23's carefully wrought framework for class certification.

"The heightened ascertainability requirement," the Mullis Court held, "gives one factor in the balance absolute priority, with the effect of barring class actions where class treatment is often most needed: in cases involving relatively low-cost goods or services, where consumers are unlikely to have documentary proof of purchase." Mullins, at 4.

"We decline to follow this path and will stick with settled law," the Court writes. "Nothing in Rule 23 mentions or implies this heightened requirement under Rule 23(b)(3), which has the effect of skewing the balance that district courts must strike when deciding whether to certify classes." Id. at 3.

The Seventh Circuit's precedent, Judge Hamilton wrote, already requires trial courts to deny certification to proposed classes that are too vaguely defined, rely on subjective criteria such as someone's state of mind, or contain "fail safe" provisions that depend on the defendant's liability. Id. at 8-11. And according to the Seventh Circuit in Mullins, that's enough.

The plaintiff in Mullins filed a putative class action against Direct Digital, LCC, alleging that the company had fraudulently represented that its product, Instaflex Joint Support, relieves joint discomfort. Plaintiff alleges that statements on the Instaflex labels and marketing materials – "relieve discomfort," "improve flexibility," "increase mobility," "support cartilage repair," "scientifically formulated," and "clinically tested for maximum effectiveness" – are fraudulent because the primary ingredient in Instaflex, glucosamine sulfate, is nothing more than a sugar pill and there is no scientific support for these claims. The complaint asserts claims for consumer fraud under the Illinois Consumer Fraud and Deceptive Practices Act, 815 ILCS 505/1 et seq., and similar consumer protection laws in nine other states. Id. at 5.

Mullins moved to certify a class of consumers "who purchased Instaflex within the applicable statute of limitations of the respective Class Sates for personal use until the date notice is disseminated." The District Court certified the class under Rule 23(b). Id. at 5-6.

Direct Digital filed a petition for leave to appeal under Rule 23(f), arguing that the District Court abused its discretion in certifying the class without first finding that the class was "ascertainable." The Seventh Circuit said it agreed to consider Digital Direct's interlocutory appeal because it wanted to address what it called "the recent expansion of 'ascertainability, including among district courts within this circuit.'" Id. at 6.

The Mullins Court affirmed the lower court's decision to grant certification, finding that the class definition approved below "complies with…settled law…" Slip Op., at 9. According to the Court: "It is not vague. It identifies a particular group of individuals (purchases of Instaflex) harmed in a particular way (defrauded by labels and marketing materials) during a specific period in particular areas. The class definition also is not based on subjective criteria. It focuses on the act of purchase and Direct Digital's conduct in labeling and advertising the product. It also does not create a fail-safe class." Id. at 11.

The opinion thoroughly considers four policy justifications that have been used by courts to justify a heightened ascertainability requirement: administrative convenience, unfairness to absent class members, unfairness to bona fide class members, and due process for defendants. According to the Seventh Circuit, the framework and procedural protections of Rule 23(b) – which doesn't specifically address the issue of "heightened ascertainability" – already takes care of those concerns. Id. at 16-24.

Moreover, the Seventh Circuit said, it doesn't make any sense to refuse to certify classes to protect absent and bona fide class members under the theory that they may not get the recovery they're entitled to unless plaintiffs can show a way to weed out unqualified class members. Without certification, Judge Hamilton wrote, those class members will receive nothing. Slip Op., at 24. "When it comes to protecting the interests of absent class members," the opinion continues, "courts should not let the perfect become the enemy." Id. at 25. "In general, we think imposing this stringent version of ascertainability does not further any interest that is not already adequately protected by [Rule 23's] explicit requirements." Id. at 15. "On the other side of the balance," the Court writes, "the costs of imposing the requirement are substantial." Id. at 16.

Importantly, the Seventh Circuit explicitly said that affidavits from class members are an acceptable way to ascertain who is in a class – a methodology the Third Circuit specifically ruled out in its Carrera decision. Judge Hamilton said that as long as defendants have an opportunity to challenge "self-serving affidavits from plaintiffs," ascertaining class membership through plaintiffs' testimony doesn't impinge on defendants' rights. Slip Op., at 31. "We are aware of only one type of case in American law where the testimony of one witness is legally insufficient to prove a fact," the Court writes – and that's prosecution for treason. "There is no good reason to extend that rule to consumer class actions," Judge Hamilton concludes. Id. at 33.

Mullins is an important case for class action litigators. The Seventh Circuit is the first appellate court to dissect the Third Circuit's heightened ascertainability framework. The Mullins opinion meticulously traces what it refers to as the "recent expansion of 'ascertainability,'" which began in a 2012 decision from the Third Circuit, Marcus v. BMW of North America, LLC, 698 F.3d 583 (3d Cir. 2012), and peaked in the 2013 Carrera decision, which a sharply divided Third Circuit declined to rehear en banc.

Some California federal district have adopted the Third Circuit's heightened ascertainability requirement. See, e.g., Jones v. ConAgra Foods, Inc., No. C 12-01633 CRB, 2014 WL 2702726 at *8-11 (N.D.Cal. June 13, 2014) (Judge Breyer), appeal docketed, No. 14-16327; Sethvanish v. ZonePerfect Nutrition Co., No. 12-2907-SC, WL 580696 at *5-6 (N.D. Cal. Feb. 13, 2014) (Judge Conti). Other California federal courts have rejected it. See, e.g., Rahman v. Mott's LP, No. 13-cv-03482-SI, 2014 WL 6815779 at * 4 (N.D.Cal. Dec. 3, 2014) (Judge Illston); and Lilly v. Jamba Juice Co., No. 13-cv-02998-JST, 2014 WL 4652283 at *4-6 (N.D.
Cal. Sept. 18, 2014) (Judge Tigar); In re ConAgra Foods, Inc., 302 F.R.D. 537, 565-67 (C.D. Cal. 2014) (Judge Morrow). The Ninth Circuit has yet to rule on the issue.

The Eleventh Circuit recently applied a fairly strong version of an ascertainability requirement in Karhu v. Vital Pharmaceuticals, __ F. App/x __, 2015 WL 3560722 at *2-4 (11th Cir. June 9, 2015). Karhu is unpublished and is non-precedential.

Judge Koh Upholds Complaint Alleging Collusion in Market for Animators, Rejecting Statute of Limitations Defense and "Above and Beyond" Requirement to Show Fraudulent Concealment

Steve Williams
Cotchett, Pitre & McCarthy, LLP

In In re Animation Workers Antitrust Litigation, 2015 U.S. Dist. LEXIS 111262 (N.D. Cal. August 20, 2015), the Hon. Lucy H. Koh denied a motion to dismiss the plaintiffs' second amendment complaint alleging an antitrust conspiracy to fix and suppress employee compensation and to restrict employee mobility.

The Animation Workers case involves a significant factual overlap with the action In re High Tech Employees Litigation, No. 11-CV-02509-LHK, which concerned allegations that high tech employers including companies such as Apple and Google had conspired to fix and suppress employee compensation and to restrict employee mobility. The High Tech Employees case received public attention when the Department of Justice filed civil complaints in September 2010, and in December of 2010 the Department of Justice filed civil complaints against Pixar and Lucasfilm, who were named as defendants in the Animation Workers case. The DOJ's case was followed by a civil case, which received widespread press coverage throughout the world.

Plaintiffs initial complaint was dismissed on the basis of the statute of limitations. In re Animation Workers Antitrust Litigation, 2015 U.S. Dist. LEXIS 44922 (N.D. Cal. April 3, 2015). In the Second Amended Complaint, the Plaintiffs alleged that defendants fraudulently concealed the conspiracy by taking affirmative steps to conceal and mislead the Plaintiffs. This included (1) carrying out their conspiracy "in a manner specifically designed to avoid detection" such as by avoiding the creation of written documents, using code-names, using personal emails instead of business emails, and holding in-person meetings; (2) using pretextual statements regarding compensation and recruiting to conceal the true reasons for corporate decisions; (3) making misleading statements during the High Tech Employees case denying the allegations made there and calling the allegations "meritless"; and (4) using the protections of the protective order in High Tech Employees to keep secret information that would have put Plaintiffs on notice of their claims, even though the sealing of such litigation documents was not justified. 2015 U.S. Dist. LEXIS *28-39.

From the August 2015 E-Brief

Neiman-Marcus Data Breach Class Action Meets Standing Requirement, Seventh Circuit Rules

The Seventh Circuit recently overturned a district court's dismissal of a class action brought against Neiman Marcus, the high-end retailer. Remijas v. Neiman Marcus Group, LLC, No. 14-3122, 2015 U.S. App. LEXIS 12487 (7th Cir. July 20, 2015). While the decision appears to breathe renewed vigor into data breach class actions, it does have some dicta that may prove troublesome to some privacy plaintiffs with respect to the "injury-in-fact" requirement.

In the decision, the court found that a class of consumers whose financial information was compromised in a 2013 hack of the store's data systems showed "injury-in-fact" and thus had standing to sue. In doing so, the Court specifically rejected the defendant's argument that the class' injuries were too speculative because the hackers had yet to use the personal information for fraudulent charges and to assume consumers' identity. Adopting a Northern District of California judge's reasoning in In re Adobe Sys., Inc. Privacy Litig., 2014 WL 4379916 (N.D. Cal. Sept. 4, 2014), the court found that "Neiman Marcus customers should not have to wait until hackers commit identity theft or credit-card fraud in order to give the class standing, because there is an 'objectively reasonable likelihood' that such an injury will occur." 2015 U.S. Lexis 12487, * 12 (quoting Clapper v. Amnesty Int'l USA, 133 S. Ct. 1138, 1147 (2013)). The court went on to note that the purpose of a hacker breaching a store's database and stealing consumers' private information was to make fraudulent charges or assume those consumers' identities. It noted that studies show that hackers will sometimes wait up until a year before utilizing the stolen data. The court also accepted as a concrete injury the fact that consumers notified of the breach "lost time and money protecting themselves against future identity theft and fraudulent charges" by signing up for credit-monitoring services. Slip op. at 11. Consequently, the court found that the class had standing to survive a Rule 12(b)(1) motion.

At the same time, while the court did not rule on whether other injuries put forth by the class plaintiffs sufficed for standing, it did go on at length in dicta to suggest that two other theories of injury were "dubious." Slip op. at 11. The first injury that the Seventh Circuit found questionable was the notion that plaintiffs were overcharged because the store failed to invest in an adequate security system. Although the court noted that this "premium" or "overcharge" analysis has been accepted in the product liability context, the court suggested that this analysis did not apply in the data security breach situation, and seemed to suggest that it did not agree with an Eleventh Circuit decision, Resnick v. AvMed, Inc. 693 F.3d, 1317, 1328 (11th Cir. 2012), that in fact found such injury to meet the standing requirement in a data breach case.

The second injury plaintiffs alleged was that they had a concrete injury in the loss of their privacy information, which they characterized as an intangible commodity. The court cast doubt on this proposition as well, noting that this claim "assumes that federal law recognizes such a property right. Plaintiffs refer us to no authority that would support such a finding." Slip op. at 13. Plaintiffs cited to California's and Illinois' Data Breach Acts as support for the notion that Neiman Marcus' actions here violated a state law right. While the Seventh Circuit acknowledged that an actual or threatened violation of a state-law right can confer Article III standing, id at * 18, the court questioned whether Neiman Marcus had in fact violated those statutes. According to the court, a California state appellate court has found that a delay in notification is not a cognizable injury, citing Price v. Starbucks Corp., 192 Cal. App. 4th 1136, 1143 (Cal. Ct. App. 2011), and that the Illinois statute in question required a showing of "actual damages."

In addition to finding injury in fact, the court found that plaintiffs also had pled causation and redressability sufficient to meet all three requirements for Article III standing. Neiman Marcus argued that plaintiffs could not show that their injury was caused by the breach at Neiman Marcus because other large stores, such as Target, had experienced similar breaches during the same time period. The court disposed of this argument, finding that it was "certainly plausible" for pleading purposes that the plaintiffs' injuries stemmed from the Neiman Marcus data breach. Slip op. at 15. If there were multiple companies that could have exposed plaintiffs' personal information to the hackers, the court said it was defendant's burden to prove that their negligent actions were not the 'but-for' cause of the plaintiff's injury. Slip op. at 15.

Finally, the court easily disposed of Neiman Marcus' argument that the plaintiffs have nothing further to redress because they have already been reimbursed for any fraudulent charges, noting that consumers have not been reimbursed for mitigation expenses (such as obtaining long-term credit monitoring services) or future injuries. The court specifically mentioned that credit and debit card issuers have limitations on when they will reimburse for fraudulent charges. Slip op. at 16.

Thomas N. Dahdouh
Regional Director, Western Region, FTC*

*Views expressed herein are those of the author only and do not necessarily reflect those of the Commission or any Commissioner.

Second Circuit Upholds Trial Verdict Against Apple in E-Books Case

In United States v. Apple, Inc., No. 13-3741, 2015 WL 3953243 (2d Cir. June 30, 2015), the Second Circuit issued a 2-1 decision affirming the Southern District of New York's judgment that Apple had organized a conspiracy among book publishers in 2009 to raise prices across the ebook market. In her majority opinion, Second Circuit Judge Livingston clarified that a vertical organizer of horizontal price-fixing conspiracy may not escape per se Sherman Act liability merely because the organizer operates on a different market-structure level from that of the other conspiracy participants.

In 2009, when Apple first planned to enter the ebook market with an iBookstore iPad application, Amazon dominated the market with its Kindle ereader, capturing 90% of all ebook sales. Amazon used a modified version of the book publishers' traditional wholesale business model, buying ebooks from publishers at a wholesale price and reselling at uniform $9.99, without exception for new releases or bestsellers. The publishers, who frequently met and discussed joint strategies to raise prices, saw Amazon's $9.99 ebook price point as a threat to their business.

Armed with knowledge that the publishers were willing to coordinate in pressuring Amazon to raise its ebooks price point, Apple approached the publishers with a plan to allow Apple to sell ebooks at higher price points, and to eliminate price competition at the retail level. Specifically, Apple negotiated with each publisher a contract that replaced the wholesale model with an agency model, in which the publisher rather than the retailer set ebook retail prices, on the conditions that the publishers (1) agree to certain price caps above $9.99, and (2) switch all their other ebook retailers—including Amazon—to the agency model. Apple assured each publisher that each was receiving the same deal. The publishers conferred amongst themselves, agreed to Apple's deal, and by March 2010, forced Amazon to switch from the wholesale model to the agency model. As Apple and the publishers expected, the ebook prices increased.

In 2012, the Department of Justice and 33 states filed a pair of civil actions, alleging that Apple, in launching its iBookstore, conspired with five publishers to raise, fix, and stabilize retail prices for newly released and bestselling trade ebooks, in violation of § 1 of the Sherman Act, 15 U.S.C. § 1 et seq., and various state laws. By February 2013, all five publishers agreed to settle with the Department of Justice, and signed consent decrees requiring that, for two years, the publishers would not restrict an ebook retailer's ability to set ebook retail prices. Apple, however, went to trial.

After a three-week bench trial, the district court concluded that, by participating in and facilitating a horizontal price-fixing conspiracy with the publishers, Apple committed a per se unreasonable restraint of trade in violation of the Sherman Act, and, in the alternative, unreasonably restrained trade under the rule of reason. See United States v. Apple Inc., 952 F. Supp. 2d 638, 694 (S.D.N.Y. 2013). The district court then issued a five-year injunctive order preventing Apple from entering into agreements with the publishers that restrict Apple's own ability to set ebook prices, and requiring Apple to apply the same terms and conditions to ebook applications sold on its devices as it does to other applications. Apple, 2015 WL 3953243, at *1. Apple appealed the decision in its entirety, and two publisher defendants joined to appeal the district court's injunctive order.

On appeal, Apple argued that the district court, in evaluating Apple's conduct under the Sherman Act, erred in applying the per se rule. First, because Apple and the publishers sat on different levels of the ebook market structure, their ebook price agreements constituted vertical price restraints, which must be judged by the rule of reason instead of the per se rule. Id. at *17; see Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 882 (2007). Second, because the agreements were parallel but independent, the mere fact that Apple agreed to the same terms with multiple publishers could not establish that Apple consciously organized a conspiracy among publishers to raise ebook prices, even if the contracts effectively raised those prices; and a rule-of-reason analysis would show that the contracts were lawful. Apple, 2015 WL 3953243, at *18. Third, because the "nascent ebook industry" has "new and unusual features" where "the economic impact of certain practices is not immediately obvious," the per se rule is not appropriate. Id. at *31.

In addressing Apple's first two arguments, the Second Circuit explained that the relevant "agreement in restraint of trade" in this case is the price-fixing conspiracy among the publishers and Apple, not Apple's vertical contracts with the publishers. Id. at *28. It held, broadly, that the vertical organizer of a horizontal conspiracy designed to raise prices effectively agrees to a restraint that is no less anticompetitive than its co-conspirators, and therefore cannot escape per se liability. Id. The court further held "[a] horizontal conspiracy can use vertical agreements to facilitate coordination without the other parties to those agreements knowing about, or agreeing to, the horizontal conspiracy's goals. Id. at *28.

The Second Circuit addressed Apple's third argument by explaining that the "ample evidence" concerning the horizontal conspiracy's anticompetitive effects warranted "at most a 'quick look'" rule-of-reason review. Id. at *33. Under a typical rule-of-reason analysis, the plaintiff must demonstrate actual anticompetitive effects in the relevant market before the burden shifts to the defendants to demonstrate their agreement's pro-competitive effects. But where, as here, an agreement's anticompetitive effects are easily ascertained, this burden shifts immediately to the defendant. Id. The court held that even if the record had shown (which it had not) that a competitor could not enter the ebook retail market without a horizontal price-raising conspiracy, this would only prove that "the competitor was inefficient, i.e., that its entry will not enhance consumer welfare." Id. at *37. In the court's words: "Apple and the dissent err first in equating a symptom (a single-retailer market) with a disease (a lack of competition), and then err again by prescribing the disease itself as the cure." Id. at *35.

Finally in response to Apple and the two publishers' appeal of the injunctive order, the Second Circuit held inter alia that the district court was correct in deciding that the order's provisions were "necessary to protect the public from further anticompetitive conduct." Id. at 41. By delaying [for five years] Apple's ability to renegotiate price restrictions with the publishers, the order ensured that Apple and the publishers "would not be able to use that same strategy as part of a new conspiracy." Id. at 41.

David V. Sack, TKLG LLP

Second Circuit Rules "Product Hopping" Anticompetitive Under Section 2 of Sherman Act

On May 22, 2015, the Second Circuit for the United States Court of Appeals ruled in State of New York v. Actavis, 787 F.3d 638 (2d. Cir. 2015) ("Namenda") that product hopping can be anticompetitive under section 2 of the Sherman Act. This was the first case before the federal circuit courts as to when a branded drug company's perpetuation of market position through introduction of successive re-designed products, known as product hopping, violates the Sherman Act. Namenda at 643.

The defendant, Actavis, marketed a branded drug Namenda IR, a twice-daily drug for the treatment of Alzheimer's disease. As Namenda IR neared the end of its patent exclusivity period, Actavis threatened to pull it from the market, and to simultaneously introduce a new once-daily version called Namenda XR, a version claiming patent protection through 2029. Actavis claimed that the newer version was an improvement from the original in that only a single dose was needed. The State of New York alleged that Actavis' decision to withdraw virtually all Namenda IR from the market forced the Alzheimer's patients depending on Namenda IR to switch to Namenda XR before generic Namenda IR became available. The trial court found that Actavis' effective removal of Namenda IR from the market before generic entry, coupled with the launch of Namenda XR would likely impede generic competition for Namenda IR, and issued an injunction blocking Actavis from withdrawing Namenda IR from the market.

On appeal, the Second Circuit agreed that the switch from Namenda IR to Namenda XR violated section 2 of the Sherman Act, reasoning that it crossed the line from persuasion to coercion, and the removal of Namenda IR in the drug regulatory scheme prevented meaningful evaluation by patients and doctors of both Namenda XR and generic Namenda IR. Namenda at 654. Under Verizon Commc'ns Inc. v. Law Offices of Curtis V. Trinko, 540 U.S. 398 (2004), to establish a section 2 violation, a plaintiff must prove not only that defendant possessed monopoly power in the relevant market, but that it willfully acquired or maintained that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident. Namenda, at 651. Since monopoly power and the relevant market were undisputed in Namenda, the case turned on whether Actavis willfully sought to maintain or attempted to maintain its monopoly in Namenda sales in violation of section 2. Namenda at 652. Using the United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001) framework, the State of New York was required to establish that Actavis' conduct was anticompetitive, and then Actavis could proffer "nonpretextual" procompetitive justifications for the hard switch.

Although product innovation is usually promoted by the courts, "product innovation generally benefits consumers and inflicts harm on competitors, so courts look for evidence of 'exclusionary or anticompetitive effects' in order to 'distinguish between conduct that defeats a competitor because of efficiency and consumer satisfaction' and conduct that impedes competition through means other than competition on the merits." Namenda at 652, citing Trans Sport, Inc. v. Starter Sportswear, Inc., 964 F.2d 186, 188-89 (2d. Cir 1992). Citing Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263 (2d Cir. 1979) ("Berkey"), the Second Circuit explained that when a monopolist combines product withdrawal with some other conduct whose overall effect is to coerce consumers rather than persuade them on the merits of the products and to impede competition, its actions are anticompetitive. Namenda at 654.

Well-established case law makes product redesign anticompetitive when it coerces consumers and impedes competition. Namenda at 652. The court had previously mentioned in Berkey that the case may have come out differently if "upon introduction of the 110 system, Kodak had ceased producing film in the 126 size, thereby compelling camera purchasers to buy a Kodak 110 camera." Namenda at 653 (citing Berkey at 287). The Second Circuit analogized Actavis' conduct with Namenda to that in Berkey: "Here, Defendants' hard switch—the combination of introducing Namenda XR into the market and effectively withdrawing Namenda IR—forced Alzheimer's patients who depend on memantine therapy to switch to XR (to which generic IR is not therapeutically equivalent) and would likely impede generic competition by precluding generic substitution through state drug substitution laws." Namenda at 654. This hard switch, the court said, crossed the line from persuasion to coercion and was therefore anticompetitive. Id. This was contrasted with a "soft switch," by which the drug company would persuade patients and their doctors to switch from Namenda IR to Namenda XR while both drugs were available on the market, and which would not be considered coercion. Id. The evaluation and selection of products based on merit by the market was deemed one of the basic tenets of Berkey, and the main reason why the Second Circuit considered the hard switch—which denied market evaluation of the products—coercive and anticompetitive. Id.

Actavis argued that makers of generic Namenda IR could compete by persuading third-party payors and prescription-benefit managers to promote generic IR, but the Second Circuit disagreed, noting that state drug substitution laws provided the only efficient and practical means of competition for generic drugs. Namenda at 655-56. Actavis also argued that some 20 states lack mandatory generic substitution laws, but the court responded that the variance in state substitution laws was exaggerated, and that most states require AB-ratings or similar evidence of therapeutic equivalence for substitution. Namenda at 656-57. Finally, as to Actavis' argument that generic companies were "free riders," the court emphasized that this form of "free riding" by generics was specifically authorized and encouraged by state and federal law, and an integral part of the nation's overall drug competition framework. Namenda at 657-58.

After reviewing Actavis' proffered procompetitive justifications for withdrawing Namenda IR, the court deemed them all pretextual. Namenda at 658-59. Actavis' internal documents discussed the need for making the patent cliff disappear and converting the Namenda IR business to Namenda XR business as quick as possible. Id. More importantly, even though introducing the once-daily Namenda XR might be considered procompetitive, there was no justification for withdrawing Namenda IR. Rather, in taking Namenda IR off the market, Actavis' willingness to forsake profits it would have made selling Namenda IR to achieve an anticompetitive end was indicative of anticompetitive behavior. Namenda at 659.

Finally, the court rejected Actavis' position that its patent rights shielded it from antitrust liability. Namenda at 659-660. The combination of Actavis' actions placed its conduct beyond the scope of their patent rights for IR or XR individually. Namenda at 660. Moreover, as instructed by the Supreme Court's recent decision in FTC v. Actavis, patent rights do not automatically foreclose antitrust analysis, as they are both relevant in determining the scope of the patent monopoly—and consequently antitrust law immunity— that is conferred by a patent.

Abiel Garcia, Deputy Attorney General, Antitrust Section, Attorney General of California

The views expressed are of the author only and do not represent the views of the California Department of Justice.

From the July 2015 E-Brief

Certification of End-Payor Classes Denied in Cephalon Antitrust Suit

Judge Mitchell Goldberg, in a 72-page opinion on June 10, 2015, denied the request by health plans and consumers for class certification in antitrust litigation involving Cephalon's sleep-disorder drug Provigil. Vista Healthplan, Inc., et al. v. Cephalon, Inc., et al., No. 2:06-cv-1833 (E.D. Penn.). The decision was issued two weeks following a record $1.2 billion settlement between the Federal Trade Commission and Cephalon over pay-for-delay claims.

The plaintiffs sued Cephalon and four generic drug makers for entering into reverse-payment settlements they claimed excluded and delayed generic competition. Slip op. at 1-2. The plaintiffs sought certification of two classes: (1) a class of end payors based on claims under antitrust and consumer protection laws of 23 states and the District of Columbia, and (2) an unjust enrichment class based on claims under the laws of 25 states and the District of Columbia. Id. at 2. The plaintiffs' expert opined that, but-for the settlement agreements, the generic makers would have launched their generic version of Provigil sooner, which would have brought significant savings to end payors. He estimated the aggregate amount of overcharges to be $2.449 billion. He also examined the defendants' profits gained from the alleged anticompetitive conduct and opined that the aggregate amount owed to the unjust enrichment class was $2.507 billion. Id. at 39.

The defendants presented competing expert testimony that significant variations in the pharmaceutical and insurance industries prevented the plaintiffs from being able to identify class members or prove antitrust impact and damages without individualized inquiry. The defense expert also identified several categories of potentially uninjured persons who might otherwise fall within the proposed class definition: brand loyalists, consumers with the same copay for branded and generic drugs, consumers who had no out-of-pocket expenses, and consumers whose insurers would place the generic version on a "non-preferred" tier.

On the issue of ascertainability, the Court examined recent Third Circuit law, which requires a two-fold inquiry: (1) the class is "defined with reference to objective criteria; and (2) there is "a reliable and administratively feasible mechanism for determining whether putative class members fall within the class definition." Id. at 10 (quoting Byrd v. Aaron's Inc., 784 F.3d 154, 163 (3d Cir. 2015)). The Court found that plaintiffs had failed to present evidence of a reliable methodology for identifying class members. Under Third Circuit precedent, it is insufficient to rely solely on a potential class member's "say so" that they belong within the class through affidavits or declarations. Id. at 11, 20 (rejecting plaintiffs' reliance on In re Nexium Antitrust Litig., 777 F.3d 9 (1st Cir. 2015)). Plaintiffs must, "at the time of class certification, present a methodology to identify class members, and prove by a preponderance of the evidence that such methodology will be effective and will not require extensive individualized inquiry and mini-trials." Id. at 19 (emphasis in original). The plaintiffs also failed to establish any administratively feasible methodology for identifying class members. Id. at 21-24. The Court distinguished the rigorous analysis required by the Third Circuit for establishing ascertainability from claims administration:

"My concerns about ascertainability focus on whether Plaintiffs can reliably identify class members at the outset. By contrast, the fund administration process would occur at the conclusion of litigation, and simply verify that any particular consumer or TPP is indeed one of the previously-identified members of the class."

Id. at 23.

On the issue of predominance in plaintiffs' antitrust claims, the Court held that the plaintiffs had not sufficiently proven that they were able to demonstrate classwide antitrust impact due to various groups of uninjured persons that remained within the class and because identifying and removing these uninjured class members would require extensive individualized inquiry. Id. at 30-38. The Court found that the prevalence of uninjured class members was more than de minimis and that plaintiffs' proposed exclusions did not resolve the predominance issue in absence of a methodology that would identify and remove those persons on a classwide basis. Id. at 34, 37.

With respect to damages, the Court held that the plaintiffs had demonstrated predominance through their expert's yardstick methodology, which took individual variations among class members into consideration. Id. at 38-45. Individual variations in damages calculations, the Court held, did not defeat predominance. Id. at 42.

The Court further held that common questions of law did not predominate as to the plaintiffs' consumer protection and unjust enrichment claims. The Court conducted choice-of-law analysis and concluded that the laws of the purchaser states govern the proposed class' consumer protection and unjust enrichment claims. Id. at 56, 69. The Court ruled that plaintiffs failed to offer a feasible solution to address variations among state laws. Id. at 60, 70.

Qianwei Fu
Zelle Hofmann Voelbel & Mason LLP

District Court Refuses to Dismiss Google Wallet Data Privacy Action

In Svenson v. Google, Inc., N.D. Cal., Case No. 13-cv-04080 (N.D. Cal. Apr. 1, 2015), the Hon. Beth Labson Freeman denied a motion to dismiss a privacy class action against Google, Inc. and Google Payment Corporation (collectively, "Google") involving Google's electronic payment service, Google Wallet. The Court held that plaintiff had alleged sufficient facts to show that Google may have breached its contractual obligations and California's Unfair Competition Law ("UCL"). The Court dismissed two other claims alleging that Google had violated provisions of the Stored Communications Act ("SCA") in disclosing Google Wallet users' personal information to third parties.

Google Wallet is an electronic payment processing service application, which is the exclusive method used by customers to purchase Apps from the Google Play Store. Plaintiff alleged that prior to the filing of her lawsuit, Google's "blanket practice" was to ignore its privacy policies and share Google Wallet user's personal information with third-party mobile application ("App") vendors whenever the user purchased the App from the Google Play Store. Plaintiff alleged that sharing of such personal information, including names, addresses, zip codes, phone numbers, email addresses, and purchase authorization, was not necessary to purchase Apps and was not otherwise authorized by the Google Wallet terms of service.

Google first argued that Plaintiff had not established Article III standing to bring her state law claims for breach of contract, breach of the implied covenant, and unfair competition. The Court disagreed and held that Plaintiff has alleged facts sufficient to state these state claims, meaning that she has alleged that she suffered damages ("injury in fact") resulting from Google's breach of contract, breach of the implied covenant, and unfair competition "fairly traceable to the challenged conduct.

In its analysis of the damages element of Plaintiff's breach of contract claim, the Court considered two theories: benefit of the bargain and diminution of value of personal information. Under the first theory, Plaintiff alleged that she did not receive the contracted-for privacy protections when the services provided by Google--which obtained access to and disclosed her personal information and also retained a percentage of the App's purchase price as a fee for payment processing--were worth less than the services Plaintiff agreed to accept. The Court found these allegations were sufficient.

As to the second theory, Plaintiff alleged that Google's practice of sharing users' personal information diminished the sales value of that personal information. Plaintiff highlighted that there is a demand for personal information and, as a result of Google's conduct, Google Wallet users "have been deprived of their ability to sell their own personal data on the market." Citing to In re Facebook Privacy Litig., 572 Fed. Appx. 494 (9th Cir. 2014), the Court disagreed with Google's argument that Plaintiff was required to plead factual specificity as to how Google's use of the information deprived Plaintiff of the information's economic value. In Facebook Privacy Litig., the Ninth Circuit held that allegations that information disclosed by Facebook could be used to obtain personal information about plaintiffs, and that they were harmed by both the dissemination of such information and by losing the sales value of that information, were sufficient to establish an "injury in fact." Judge Freeman pointed out that the Ninth Circuit's holding in Facebook Privacy Litig. does not require factual specificity as to how the defendant's use of information deprived plaintiff of the information's economic value. Here, the Court held, Plaintiff's factual allegations of diminution in value of her personal information were sufficient to show a basis for contract damages for pleading purposes.

With respect to Plaintiff's UCL claim, Google argued that the thrust of plaintiff's UCL claim was Google's misrepresentation of its practice with respect to disclosure of user information and that Plaintiff must allege reliance upon these misrepresentations. The Court disagreed, holding that Plaintiff stated a claim by alleging Google violated its own privacy policies in violation of Cal. Bus. & Prof. Code § 22576 (which prohibits a commercial web site or online service operator from failing to comply with its own privacy policies), and Google's practice of making blanket disclosure of user information -- which by its very nature, frustrated the contracted-for privacy protections.

The Court dismissed Plaintiff's causes of action under the SCA, holding that the personal information shared by Google with third party App vendors was not the sort of "contents of a communication" protected by the SCA, but rather "a record or other information" that is not subject to the SCA. The Court analyzed the Ninth Circuit's decision in Zynga v. Privacy Litig., 750 F.3d 1098 (9th Cir. 2014), which held Facebook ID and the addresses of the Facebook webpage a user was viewing when the user clicked the link were not "contents of a communication" because such information was not the "substance, purport, or meaning of a communication." Judge Freeman ruled that Zynga should not be read narrowly to mean that only automatically generated data may constitute record information not subject to the SCA's protections. Rather, the Court concluded, Zynga holds that "record information" includes such information as a user's name, email address, account name, mailing address, and the like. The Court then went on to hold that Plaintiff's personal information in this instance was no more than "record information," and thus not subject to protection under the SCA.

Shiho Yamamoto
Pritzker Levine LLP

Supreme Court Denies Certiorari Petitions in Motorola and Hui Hsuing

On June 15, 2015, the United States Supreme Court denied petitions for certiorari in Motorola Mobility LLC v. AU Optronics, 775 F.3d 816 (7th Cir. 2015) and Hsiung v. United States, 778 F.3d 738 (9th Cir. 2015). Both of these cases involved application of the Foreign Trade Antitrust Improvements Act to international cartels, and many believed that one or both of these cases would be reviewed by the Court. Prior ebriefs discussing these cases appear in reprint at the end of this article.

Motorola Mobility and Hsiung both involved the TFT-LCD price fixing conspiracy, and the courts of appeals reached conclusions about the impact of the FTAIA that some considered inconsistent. In Hsiung, criminal price fixing convictions were affirmed over FTAIA objections, while the Motorola Mobility court held the FTAIA to be a bar to the maintenance of the civil damages claims in issue. A closer look reveals the absence of any cert. worthy conflict between the two decisions, notwithstanding the ongoing differences among the courts of appeals on the proper interpretation of the FTAIA.

The claims in issue in Motorola Mobility were based on foreign purchases of price-fixed TFT-LCD panels by foreign Motorola subsidiaries. The subsidiaries assigned their claims to Motorola, which filed suit in the Northern District of Illinois.

The Seventh Circuit, in Motorola Mobility, held that the FTAIA "import commerce exclusion" did not apply (the sales of TFT-LCD panels to the subsidiaries took place overseas, and Motorola, not the defendants, imported the finished products in which the panels were incorporated), requiring that the court consider whether the foreign price fixing conduct had a "direct, substantial, and reasonably foreseeable effect" on domestic U.S. commerce that "[gave] rise to" the claims asserted by Motorola. The Seventh Circuit found no effect that gave rise to the claims assigned by the foreign subsidiaries to their U.S. parent. The harm that gave rise to the claims occurred overseas when the subsidiaries purchased the price-fixed panels.

The Ninth Circuit, in Hsuing, also considered both the import commerce exclusion and the effects exception. The court held the import commerce exclusion satisfied on the basis of its determination that the conspirators made direct import sales of price-fixed panels. That made consideration of the effects exception unnecessary, but the court nonetheless evaluated the evidence presented at trial and, as explained in the discussion that appears below, found the evidence sufficient to support a finding that the foreign conduct in issue had a direct, substantial, and reasonably foreseeable effect on domestic U.S. commerce. The Ninth Circuit noted two areas of actual or potential disagreement among the courts of appeals. With evidence of imports by conspirators, see 778 F.3d at 776, the Ninth Circuit found it unnecessary to consider the ultimate scope of the import commerce exclusion. The court did not take a position on the import commerce approach adopted by the Third Circuit in Animal Science Products, Inc. v. China Minmetals Corp., 654 F.3d 462, 470 (3d Cir. 2011) ("Functioning as a physical importer may satisfy the import trade or commerce exception, but it is not a necessary prerequisite. Rather, the relevant inquiry is whether the defendants' alleged anticompetitive behavior 'was directed at an import market.'") (quoting Turicentro, S.A. v. Am. Airlines Inc., 303 F.3d 293, 303 (3d Cir. 2002)). See 778 F.3d at 755 n.8.

The Ninth Circuit also acknowledged that the test applied under Ninth Circuit law to determine whether an effect is "direct," whether the effect "follows as an immediate consequence of the defendant's activity," is different from the "reasonably proximate causal nexus" test applied by the Second and Seventh Circuits. The court found reconsideration of the "direct" test to be beyond the power of the Hsiung panel and unnecessary because the Ninth Circuit test the court found satisfied by the Hsiung trial evidence was more favorable to the defendants than the "reasonably proximate causal nexus" test.

Neither case presented an occasion for consideration of how the import commerce exclusion might apply when the conspirators do not import price-fixed goods. The Seventh Circuit's conclusion that there was no domestic effect that "[gave] rise to" the claims asserted by Motorola, and the Ninth Circuit's determination that the effects exception was satisfied under either test, made the difference between the Ninth Circuit test and the Second/Seventh Circuit test unimportant to the outcome of either case. There was no need for Supreme Court intervention on either issue in these cases. FTAIA issues continue to be hotly contested in numerous cases, however, and Supreme Court attention to the conflicting positions adopted by the courts of appeals is needed.

Robert E. Freitas
Freitas Angell & Weinberg LLP

From the June 2015 E-Brief

Third Circuit: Class Certification Expert Testimony Must Survive Daubert Challenge

On April 8, 2015 the U.S. Court of Appeals for the Third Circuit issued an opinion vacating an order granting class certification, holding that when a plaintiff relies on expert testimony to satisfy the requirements of Rule 23, that testimony is subject to scrutiny under the standards set forth in Daubert v. Merrell Dow Pharmaceuticals. In re Blood Reagents Antitrust Litig., 783 F.3d 183 (3d Cir. 2015).

This multi-district litigation was filed in 2009 by direct purchasers of blood reagents, products used to test blood compatibility between donors and recipients. Plaintiffs allege that defendant Immucor, Inc., which settled with the plaintiffs prior to class certification, and defendant-appellant Ortho-Clinical Diagnostics, Inc. ("Ortho") engaged in an unlawful conspiracy to fix blood reagent prices.

In 2012, after preliminary approval of plaintiffs' settlement with Immucor, the District Court for the Eastern District of Pennsylvania heard argument on plaintiffs' motion for class certification. In support of their motion, plaintiffs relied upon expert testimony about impact and damages. Ortho opposed class certification, arguing that plaintiffs had failed to establish predominance under Rule 23(b). Ortho argued, among other things, that plaintiffs' expert was not capable of producing "just and reasonable damage estimates at trial" and that the expert, by failing to distinguish lawful from unlawful price increases, had failed to show necessary class-wide antitrust impact. The District Court rejected these challenges, and certified a direct purchaser class. Applying then-controlling Third Circuit authority, Behrend v. Comcast Corp., the District Court held it was premature to consider objections on the merits to the reliability of the expert's damages model, as the model could "evolve" over time to become admissible evidence. See In re Blood Reagents Antitrust Litig., 283 F.R.D. 222, 240-244 (E.D.Pa. 2012).

The Third Circuit vacated the order granting class certification. The Court held that under the Supreme Court's decision in Comcast v. Behrend, the "could evolve" formulation of the Rule 23 standard was no longer good law. 783 F.3d at 186. Relying in part on Comcast, the Court then held that, in order to rely on expert testimony for class certification purposes, a plaintiff must "demonstrate[], and the trial court find[], that the expert testimony satisfies the standard set out in Daubert." Id. at 187. The Court held that a Daubert analysis is necessary, reasoning that a party seeking class certification must "prove" that the relevant requirements of Rule 23 are met. "Expert testimony that is insufficiently reliable to satisfy the Daubert standard cannot 'prove' that the Rule 23(a) prerequisites have been met 'in fact,'" the Court found, "nor can it establish 'through evidentiary proof' that Rule 23(b) has been satisfied." Id. The Third Circuit then remanded to the district court to determine which of Ortho's objections "challenge those aspects of plaintiffs' expert testimony offered to satisfy Rule 23" and to conduct a Daubert analysis if necessary for those aspects. Id. at 188.

The decision in In Re Blood Reagents brings the Third Circuit in line with district courts in the Seventh, Eighth and Ninth Circuits in holding that expert evidence at the class certification stage must satisfy Daubert.

Elizabeth C. Pritzker
Pritzker Levine LLP

Most Claims Upheld in Capacitors Cartel Case

In re Capacitors Antitrust Litigation, File No. 14-cv-03264-JD (N.D. Cal. May 26, 2015).

The Hon. James Donato issued an order denying defendants' motions to dismiss for the most part in a consolidated antitrust action alleging price fixing conspiracies in the capacitor market. Judge Donato found that the direct purchaser plaintiffs (DPPs) and indirect purchaser plaintiffs (IPPs) made enough factual allegations in their complaints to support a price-fixing claim for many of the defendants. Judge Donato granted motions to dismiss as to certain defendants who belonged to a family of alleged conspirators because the complaint did not specifically allege these defendants' activity in the alleged conspiracy.

First, Judge Donato assessed the validity of defendants' claims against the DPP complaint alleging defendant manufacturers in Japan, Taiwan, Germany, and the U.S. participated in a single overarching conspiracy to raise prices and prevent competition for certain capacitors. Judge Donato held that the DPP complaint as a whole had enough grounding in fact to pass the Twombly plausibility standard, as the complaint made sufficient factual allegations suggesting that an agreement to fix prices could have been made. Further, Judge Donato found that DPP's complaint need not allege the same conspiracy as the IPP complaint to be plausible. Judge Donato further ruled that government investigations alleged in plaintiffs' complaint carried no weight in determining plausibility as government processes like ACPERA are not transparent. Denying defendant's request to dismiss DPP's claim to the extent that it accrued before the Clayton Act's four-year statute of limitations, Judge Donato found that the DPPs made sufficiently specific allegations to satisfy the pleading standards for fraudulent concealment.

Denying defendants' joint motion to dismiss the "majority" of U.S. subsidiaries, Judge Donato granted fifteen defendants' motions to dismiss with leave to amend to allege more specific facts showing that the U.S. subsidiaries participated in or were responsible for the cartel.

Second, Judge Donato assessed defendants' motion to dismiss the IPP complaint alleging two conspiracies over two different time periods for the same capacitors as the DPP complaint. Rejecting defendants' argument that IPPs lacked Article III standing for failure to allege injury in fact, Judge Donato found IPPs' allegation that capacitors are identifiable components that pass through the chain of distribution in the same form sufficient for standing. Judge Donato likewise found defendant's argument under Associated General Contractors of California v. California State Council of Carpenters, 459 U.S. 519 (1983) ("AGC") unpersuasive, holding that no definitive decisions hold that AGC applies to California antitrust claims.

Judge Donato granted defendant's motion to strike claims under California's Cartwright Act and Unfair Competition Law. Both sides agreed that unjust enrichment is not a claim and Judge Donato dismissed the stand-alone unjust enrichment claim with prejudice. As with defendants' challenge to the DPP's claims, Judge Donato denied defendants' motion to dismiss based on the statute of limitations. Judge Donato granted six defendants' motion to dismiss with leave to amend, finding the complaint failed to adequately allege that the particular defendants took part in the alleged conspiracy.

Hilary A. Hess
Ms. Hess is a Summer Associate at Cotchett, Pitre & McCarthy LLP

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.

Bill Toth
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.

Joyce Chang
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.

Joyce Chang
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.

Elizabeth Tran
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.

Joyce Chang
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
Morgan Lewis

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.

Dominique Chantal-Alepin
Mayer Brown

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

  1. 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:

  1. TFT-LCDs are a substantial cost component of finished products.

  2. 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.

  3. 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.

Steve Williams
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.”

Joyce Chang
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.

Steve Williams
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.

Steve Williams
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.

Dominique Chantal-Alepin
Mayer Brown

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.

Dominique Chantal-Alepin
Mayer Brown

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.

Case Background:

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.

Case Background:

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.

In a separate part of the order, the Court rejected Adobe’s challenge to plaintiffs’ claim for a declaratory relief related to Adobe’s contractual obligation, under its End User Licensing Agreements (EULAS) and General Terms of Use Agreements (GTUAs), to provide reasonable security. Adobe argued that plaintiffs’ declaratory relief claim is essentially a declaration that Adobe breached its contractual obligations. According to Adobe, plaintiffs had alleged a breach of contract claim “in disguise” without alleging all elements for breach of contract. Judge Koh again disagreed. The Court held that plaintiffs are not seeking a declaration that Adobe was in breach of a contract at the time of the 2013 data breach alleged, but rather a declaration clarifying Adobe’s ongoing contractual obligation to provide reasonable security. Finding that plaintiffs’ claims are prospective in nature, the Court held that plaintiffs’ declaratory relief claim “requests precisely the type of relief that the Declaratory Relief Act is supposed to provide: a declaration that will prevent future harm from ongoing and future violations before the harm occurs.”

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

From the November 2014 E-Brief

Urethane Antitrust Ligation: 10th Circuit upholds $1 billion jury verdict, batting away Walmart and Comcast class certification challenges

In upholding the price-fixing jury verdict in this case against polyurethane manufacturer Dow Chemical, In re Urethane Antitrust Litigation, 2014 U.S. App. LEXIS 18553 (10th Cir. Sept. 29, 2014), the 10th Circuit passed on key challenges to the class certification during the trial proceedings below.  In doing so, the court deals with some of the ramifications of the Supreme Court’s decisions in Wal-Mart and Comcast.

A little procedural background is necessary here. Before trial, Dow moved to deny class certification.  That motion was denied.  After trial, Dow again moved to decertify the class.  In the first motion, the pretrial one, plaintiffs used Dr. John Beyer to show that a price-fixing conspiracy, as alleged, would affect all buyers, thus showing a common question susceptible to class-wide proof.  At the end of the trial, plaintiff used a different expert, Dr. James McClave, who was the expert plaintiffs used at trial.  The trial judge denied this second motion as well. 

Dow raised two main challenges to the trial court’s handling of class certification.  Its first argument relied on Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011).  Second, it argued that the trial court ran afoul of Comcast Corp. v. Behrend, 113 S. Ct. 1426 (2013).The first argument claimed that the trial court erred in certifying a class where common liability determinations did not predominate. The second argument turned on what Dow argued was a failure to recognize that there were no common damages questions. We take each in turn. 

Wal-Mart Challenge

Dow argued that it was denied the right to show in individualized proceedings that Dow was not liable for anything that happened to particular class members; and Dow argued the district court should have denied class certification on the basis of extrapolated impact and damages.

The court relied on a presumption that price-fixing affects all market participants, creating an inference of class-wide impact even when prices are individually negotiated. (Other courts have disagreed.)  This was particularly appropriate for urethanes, the court reasoned, because the price-fixing affected baseline price levels.

The court also rejected the attack on Dr. McClave’s regression models, which plaintiffs used to bolster their argument of class-wide impact when Dow sought to decertify the class at the end of the trial.  (Remember that McClave was not used at the class cert. stage – plaintiffs used Dr. Beyer as an expert, who Dow had not challenged.)

As for Dow’s motion for decertification post-trial, the court found the motion for decertification was too late, coming 21 months after Dow received McClave’s report.  Second, the court distinguished McClave’s model from the expert model in Wal-Mart by saying that the McClave model was focused only on damages, not liability as in Wal-Mart.

Comcast challenge 

Dow argued that Dr. McClave did the same thing in this matter as he did in Comcast, which the Supreme Court rejected for purposes of showing class-wide damages.  In Comcast, the Court excoriated Dr. McClave for assuming in his modeling the validity of four different antitrust theories, even though the district court had rejected three of them.  Dow argued that the same thing happened here.

The 10th Circuit, however, read Comcast differently for two reasons.  First, according to the court, that decision turned on a concession plaintiffs made there which the plaintiffs did not repeat: namely, that class certification required a method to prove class-wide damages through a common methodology.  Second, the court focused on the fact that McClave’s study was examined by the trial court only at the end of trial, not at the beginning of the trial.  The Court in Comcast was worried that, with the McClave study undermined by this fatal flaw, individual issues would predominate at trial.  Here, the trial had already happened, and individual damages issues did not predominate, so this concern was not present.  Moreover, the court found that Dow never really asked for individualized findings on damages during the trial.  Consequently, the trial judge did not abuse his discretion to find a “fit” between McClave’s study and plaintiffs’ theory of damages and thus reject the motion to decertify.

This decision on class certification issues turns a lot on mistakes by defense counsel, particularly failing to challenge McClave earlier and failing to ask for individualized damage findings. Moreover, the decision also cabins Comcast in particular to concessions made by the plaintiff there.  It will be interesting to see how other courts interpret Wal-Mart and Comcast, as well as Urethane.

From the October 2014 E-Brief

Recent Decisions of Interest: County of San Mateo v CSL Limited et al:  District Court for the Northern District of California Holds That Federal Bar on “Umbrella Damages” Does Not Apply to Claims Under California’s Cartwright Act


On August 20, 2014, Magistrate Judge Jacqueline Scott Corley of the United States District Court for the Northern District of California issued an opinion in County of San Mateo v. CSL Limited et. al., addressing the availability of so-called “umbrella damages” under the Cartwright Act (Cal. Bus. & Prof. Code Sec. 16700 et seq.), California’s antitrust statute.  Defendants moved for partial summary judgment on the grounds that such damages – which are based on the theory that defendants’ conspiracy to decrease supply created a “price umbrella” that spread artificially inflated prices throughout the market – are precluded as a matter of law as “unacceptably speculative.”  The Court denied defendants’ motion and held that such damages are not barred as a matter of law under the Cartwright Act.

Case Background:

In this California-law antitrust action, the County of San Mateo alleges that certain manufacturers of pharmaceutical products derived from human blood plasma conspired to restrict the supply of such products thereby causing the County, among others, to pay artificially high process for the products.

The underlying blood plasma products at issue are plasma-derivative therapies IVIG and albumin, among others.  These therapies are derived from human blood plasma collected from donors and sellers at U.S. collection centers. 

The County sued defendants CSL Limited, CSL Behring LLC, CSL Plasma (collectively “CSL”), Baxter International, Inc. (“Baxter”) and Plasma Protein Therapies Association (“PPTA”), alleging that CSL and Baxter, along with the trade group PPTA, conspired to reduce the supply of plasma-derivative protein therapies.  The conspiracy is alleged to have caused artificial shortage of IVIG and albumin, which in turn caused inflated products for those therapies. 

CSL and Baxter allegedly control 60 percent of the U.S. market for all plasma-derivative protein therapies.  During the alleged conspiracy period, the County purchased some IVIG and albumin from CSL, but made no such purchases from Baxter. 

The County bought its IVIG and albumin indirectly from distributors and most of the products purchased by the County were manufactured by non-defendants.  These non-defendants are not alleged to have participated in the conspiracy.  The County contends, however, that it nonetheless paid supra-competitive prices for the IVG and albumin it purchased from non-conspirators, on the theory that defendants’ conspiracy to decrease supply created a “price umbrella” that spread the artificially inflated price throughout the market.

Defendants moved for partial summary judgment, arguing that the County, as a matter of law, may not seek damages from defendants for products purchased from rival non-conspirators at prices that were inflated by defendants’ anti-competitive conduct.  Defendants relied on federal case law, including specifically, the Ninth Circuit decision in In re Coordinated Pretrial Proceedings in Petroleum Products Antitrust Litigation, 691 F.2d 1335 (9th Cir. 1982) (Petroleum Products), which holds that these type of umbrella damages are categorically barred under federal antitrust law on the grounds that such damages are inconsistent with the Supreme Court’s rationale underlying its decision in Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977).   Because the California courts have not addressed the question, defendants argued that federal law on the issue was instructive on the issue.

Magistrate Judge Corley disagreed.  “The Court will not assume that umbrella damages are disallowed under California law, as under federal law, just because a California court has not addressed the issue.”  The Court also found that Petroleum Products “is not instructive” on the issue of what the Cartwright Act provides with respect to damages available to indirect purchaser plaintiffs.  “The California Legislature, unlike the United States Supreme Court,” the Court reasoned, “does not believe that a plaintiff’s attempt to estimate overcharges incurred through a multi-tiered is unacceptably speculative and complex; rather, the California Legislature has expressly allowed such claims.  See Cal. Bus. & Prof. Code § 16750(a).  Thus, umbrella damages—which, as explained above, are calculated the same way as indirect non-umbrella damages—cannot be categorically barred under the Cartwright Act for failing to meet Illinois Brick’s benchmark for speculation and complexity.”

In denying defendants’ motion for partial summary judgment, Magistrate Judge Corley noted that her analysis differed from that of U.S. District Court Judge Susan Illston who previously had held, under the reasoning of Petroleum Products, that an indirect purchaser’s claims for umbrella damages arising from a multi-tiered distribution chain were barred under the Cartwright Act.  See In Re TFT-LCD (Flat Panel) Antitrust Litigation, 2012 WL 6708866, at *6-7 (N.D. Cal. Dec. 26, 2012) (LCDs).  Magistrate Corley “respectfully disagree[d]” with the LCDs court, which relied primarily on Petroleum Products and federal  precedent rather than the California antitrust statute, and declined to follow LCDs’ contrary holding.

Implications for Damages Claims in California Antitrust Actions

Magistrate Judge Corley departs from federal Ninth Circuit precedent, which holds that umbrella damages are not available to indirect purchaser plaintiffs in antitrust actions brought under federal antitrust laws.  The Court holds that these types of damages are not barred as a matter of law in state law antitrust cases brought under the California Cartwright Act.  The Court’s ruling, while permitting umbrella damages to be pleaded, does not relieve plaintiffs of their burden to prove causation to a reasonable probability at trial.

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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.

2013 Items

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: