A New York federal judge denied Penguin’s motion to compel arbitration for a subset of the putative class in In re: Electronic Books Antitrust Litigation. The plaintiffs claim that Penguin, other publishers, and Apple Inc., fixed prices for electronic books or “eBooks.” Penguin argued in their motion that the putative class members who purchased their eBooks through the vendors Amazon.com and Barnes & Noble agreed to arbitrate any disputes related to their purchases of eBooks.
Judge Denise Cote denied Penguin’s motion based in large part on the recent decision by the Second Circuit, In re American Express Merchants’ Litigation (“Amex III”), 667 F.3d 204 (2d Cir. 2012). Judge Cote explained that the eBooks case “falls squarely within the ambit of” Amex III. The district judge noted that in “Amex III, the Second Circuit invalidated an arbitration agreement that contained a class action waiver on the grounds that the costs of pursing the action through an individual arbitration, when compared with the size of the damages at issue, rendered arbitration prohibitively expensive.” In the eBooks case, plaintiffs expected at most a median recovery of $540 in treble damages and were faced with several hundred thousand dollars to millions of dollars in expert expenses. Judge Cote criticized Penguin for not demonstrating “how plaintiffs could rationally account for th[e] risk of losing and still go forward with individual arbitrations that will net them, at most, an average of $540.” The district court concluded that “it would be economically irrational for any plaintiff to pursue his or her claims through an individual arbitration.” Abbey Spanier will continue to monitor the growing body of case law regarding the intersection of arbitration clauses and class actions.
Abbey Spanier, LLP, located in New York City, is a well-recognized national class action and complex litigation law firm.
In late 2011, a group of software engineers filed antitrust lawsuits against seven behemoths of the high-tech industry. The high-tech company defendants—Apple, Pixar, Google, Intel, Intuit, Lucasfilm, and Adobe—utilized a policy known as “Do not cold call,” whereby each pair of defendant companies entered into bilateral “Do not cold call” agreements that shared “the names of the other company’s employees on a ‘Do not cold call’ list and instructed recruiters not to cold call the employees of the other company.” In re High-Tech Employee Antitrust Litigation, No. 11-CV-02509, 2012 U.S. Dist. LEXIS 55302, at *11 (N.D. Cal. Apr. 18, 2012). Prior to this class action, between 2009 and 2010, the Department of Justice investigated the defendants’ recruiting practices. The DOJ concluded that the agreements were “facially anticompetitive” and that they “were naked restraints of trade that were per se unlawful under the antitrust laws.” Id. at *6–7. In the instant action, the defendants filed a motion to dismiss. And this past April, the Honorable Lucy Koh, sitting in the Northern District of California, denied the defendants motion to dismiss as to the Sherman Act § 1 violation allegations.
Between 2007 and 2010, the high-tech companies each entered into nearly identical bilateral agreements with the intent to stabilize compensation and to eliminate or greatly reduce the mobility of their highly skilled employees. See id. at *12–13. According to the court, “[e]ach bilateral agreement in this case applied to all employees of a given pair of Defendants; was not limited by geography, job function, product group, or time period; and was not related to a collaboration between that pair of Defendants.” Id. at *12. At one point, Apple’s CEO at the time, Steve Jobs, contacted the CEO of Palm in order to propose the same “do not cold call” agreement between the two companies. The consolidated amended complaint purports that the Palm CEO, Edward Colligan, refused Steve Jobs’s offer and told him, “Your proposal that we agree that neither company will hire the other’s employees, regardless of the individual’s desires, is not only wrong, it is likely illegal.” Id. at *16.
Section 1 of the Sherman Act prohibits “[e]very contract, combination . . . , or conspiracy, in restraint of trade.” 15 U.S.C. § 1. And the defendants moved to dismiss on the usual Twombly and Iqbal grounds, claiming that plaintiffs failed to allege sufficient facts that would support an “overarching conspiracy” among the defendants. See id. at *21. In denying their motion to dismiss, the court examined “who, did what, to whom (or with whom), where, and when?”—as is typically done in the Ninth Circuit for Section 1 Sherman Act claims. See Kendall v. Visa U.S.A., Inc., 518 F.3d 1042 (9th Cir. 2008). In the instant case, there were overlapping board members who simultaneously sat on multiple defendants’ boards. The court noted that this fact was sufficient to raise plausible grounds to support a conspiracy claim, i.e., “a unity of purpose or a common design and understanding.” High-Tech Employee, 2012 U.S. Dist. LEXIS 55302, at *37; see also Am. Tobacco Co. v. United States, 328 U.S. 781, 810 (1946).
Notably, the court concluded, “In light of Plaintiffs’ specific allegations concerning the industry-wide procompetitive effects of cold calling recruiting practices, it is plausible to infer that even a single bilateral agreement would have the ripple effect of depressing the mobility and compensation of employees of companies that are not direct parties to the agreement. Plaintiffs’ allegations of six parallel bilateral agreements render the inference of an anticompetitive ripple effect that much more plausible.” High-Tech Employee, 2012 U.S. Dist. LEXIS 55302, at *44 (emphasis added).
This case is particularly interesting because these “No Poaching” agreements were purportedly secret and possibly worldwide. The agreements were not limited to specific geographic regions, job types, or time periods. See id. at 29. Because of the breadth of these agreements, the court noted that “it is reasonable to infer that such significant wide-ranging, company-wide, and worldwide policies would have been approved at the highest levels.” Id.
David Brown is 2012 graduate of New York Law School. He was Executive Editor of the Law Review. He will be a law clerk to the Honorable Robert L. Vining, US District Court, Northern District of Georgia in the Fall of 2012 and has interned at the US Attorney’s Office for the Eastern District of New York.
Abbey Spanier, LLP, located in New York City, is a well-recognized national class action and complex litigation law firm.
On May 15, 2012, the Honorable Denise Cote, U.S. District Court Judge for the Southern District of New York, denied Apple’s and five of the largest publishing companies’ motions to dismiss in the eBooks antitrust litigation case. See In re Electronic Books Antitrust Litigation, No. 11 MD 2293, 2012 U.S. Dist. LEXIS 68058, at *2 (S.D.N.Y. May 15, 2012). A class action was brought against Apple, Inc. and the publishers for violating Section 1 of the Sherman Act and state antitrust laws. The plaintiffs allege that Apple and the publishers conspired to raise prices in the market for eBooks.
Underlying this law suit is a fight for consumers in the growing eReader/tablet markets. By 2010, three years after the release of Amazon.com, Inc.’s Kindle, Amazon had obtained 90 percent of eBook sales in the U.S. And by the second quarter of 2010, Amazon sold more eBooks than it did hard copies.
Then, in 2010, Apple prepared to release its first edition iPad. Apple, and then CEO Steve Jobs, began planning to simultaneously enter the market for retailing eBooks. As noted in Judge Cote’s opinion, “Apple announced that it had signed agreements with each [publisher] to sell eBooks under the agency model. Apple also revealed that the prices for eBooks on the iPad would be higher than $9.99.” Id. at *13. But Steve Jobs then told a reporter that “[t]he prices [on the iPad and the Kindle] will be the same,” and “[p]ublishers are actually withholding their books from Amazon because they are not happy.” Id. at *13–14 (internal quotation marks omitted). Soon after the release of the iPad and the switch to the agency model of distribution, “Apple and the [publishers’] activities attracted the attention of state, federal, and foreign authorities. European Union antitrust regulators made unannounced raids on eBook publishers in several countries, and the European Commission announced a formal investigation into Apple and the [publishers] . . . for colluding to raise eBook prices.” Id. at *19.
“Agency” vs. “Wholesale” distribution models
Historically, as Judge Cote’s opinion states, the publishers have sold books using a distribution model known as the “wholesale model.” Under this model, publishers sell their books to retailers at wholesale prices, keeping a suggested retail price as a guide for the retailers. Typically, the retailers would receive between 30 and 60 percent off of the cover price, but the retailers could charge consumers any price. This model dominated the industry and continued to be used with Amazon as eBooks became popular. But as eBook sales began trending toward surpassing hard copy sales, many publishers’ distaste of the wholesale model grew.
In 2007, in order to establish its initial dominance in the eReader market, Amazon widely sold eBooks for $9.99 or less. “This was substantially less than the retail price for hardcover books. In many cases, it was even less than the wholesale prices for eBooks charged by publishers.” Id. at *5–6. The wholesale model continued until the publishers and Apple agreed to change to the “agency model” just as Apple released the iPad. Under the agency model, publishers retained the right to set the sales price through Apple’s iBookstore, but Apple would receive a 30 percent commission on each sale. See id. at *12. “Under this formula, the eBook prices would range from $12.99 to $14.99 for most newly-released general fiction and nonfiction titles.” Id.
Class Action Complaint
The plaintiffs allege that the conspiracy among the publishers to raise prices for eBooks manifested itself in three phases. First, the publishers began to “window” eBooks, i.e., delay the release of eBooks until after the release of the hardcover. Second, when windowing didn’t work, each publisher contracted with Apple to distribute eBooks under the agency model, including in each contract a most-favored-customer clause guaranteeing Apple the same price as its competitors might receive from the publishers. Third, the publishers threatened to withhold their eBooks from Amazon unless they agree to change to the agency model. See id. at *8–9.
The complaint alleges that the publishers “communicated with each other” as they negotiated with Apple and “Apple act[ed] as a conduit for their messages.” Id. at *11. These negotiations culminated in an industry-wide adoption of the agency model, the immediate effect of which was to constrain prices. See id.
Motion to Dismiss
Section 1 of the Sherman Act prohibits “[e]very contract, combination . . . , or conspiracy, in restraint of trade or commerce among the several States.” 15 U.S.C. § 1. Horizontal price-fixing agreements or market divisions among competitors on the same level are per se unlawful under the Sherman Act, regardless of the reasonableness of the agreed to prices. Proof of an actual agreement among competitors is often difficult to prove. But circumstantial evidence can show an agreement in restraint of trade. The plaintiff must allege interdependent parallel conduct that rises beyond coincidence or rational economic action. And the U.S. Supreme Court has noted that “complex and historically unprecedented changes in pricing structure made at the very same time by multiple competitors, and made for no other discernible reason,” will make out a prima facie case of a Sherman Act § 1 violation. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 556 n.4 (2007) (citation omitted).
In the instant eBooks antitrust litigation case, the court held that the plaintiffs had plausibly alleged a horizontal conspiracy in restraint of trade and that the restraint was “unreasonable per se.” Electronic Books, 2012 U.S. Dist. LEXIS 68058, at *29. The court focused on a counterfactual hypothetical to illustrate why it was very plausible that no publisher would have signed the agency agreement with Apple, and later with Amazon, without some understanding that its competitors would do the same. See id. at *32–33. Had a publisher switched to the agency model, and set higher prices, it would have lost significant market share. The court pointed out that Random House, not a party to the eBooks antitrust litigation case, “gained significant market share” from the other publishers “during months between their adoption of the agency model and Random House’s capitulation. Id. at *32. “The eBook sales by Random House increased 250 percent in 2010 as it continued to sell them at $9.99.” Id.
The court found similarities in the instant case with the facts of Interstate Circuit v. United States, 306 U.S. 208 (1939), and Toys “R” Us, Inc. v. Fed. Trade Comm’n, 221 F.3d 928 (7th Cir. 2000). In both of those cases, one company facilitated a horizontal agreement in restraint of trade by coordinating identical vertical agreements with each manufacturer or distributor. Here, Apple is alleged to have facilitated the horizontal agreement in restraint of trade. As the court points out, “Apple coordinated a series of substantively-identical vertical agreements and made clear to its vertical partners that it was offering each of them a similar deal. Just as with Toys “R” Us and Interstate Circuit, cooperation among Apple’s vertical partners was essential to the success of its plan, and the net effect of its vertical agreements was to limit the ability of its horizontal competitors, such as Amazon, to compete on price.” Electronic Books, 2012 U.S. Dist. LEXIS 68058, at *37.
The court used fairly harsh language against the publishers and Apple, invoking inculpatory quotes from Rupert Murdoch, Steve Jobs, and other CEOs of major publishers. HarperCollins, Hachette, and Simon & Schuster have already settled. After such a critical opinion favoring the plaintiffs, Apple and the other publishers may follow suit and settle too.
David Brown is 2012 graduate of New York Law School. He was Executive Editor of the Law Review. He will be a law clerk to the Honorable Robert L. Vining, US District Court, Northern District of Georgia in the Fall of 2012 and has interned at the US Attorney’s Office for the Eastern District of New York.
The Third Circuit recently addressed e-discovery, which is an evolving and developing area of law. The specific issue before the Third Circuit in Race Tires America, Inc. v. Hoosier Racing Tire Corp., was whether all the charges imposed by electronic discovery vendors to assist in the collection, processing and production of electronically stored information (“ESI”) are taxable against a losing party as “fees for exemplification [or] the costs of making copies of any materials where the copies are necessarily obtained for use in the case.” See 28 U.S.C. § 1920(4). The Third Circuit had not dealt with issue before and courts that have opined on this issue have reached conflicting decisions. The district court had ordered the losing party to pay $365,000 in e-discovery costs in a market monopoly suit against a competitor. The Third Circuit cut the award down to $30,000.
The panel discussed the significant role that e-discovery plays in litigation and noted that it “is estimated that in 2011, 1.8 zettabytes of data were created, the equivalent of 57.5 billion iPads, each with thirty-two gigabytes of storage.” The Third Circuit held “that of the numerous services the vendors performed, only the scanning of hard copy documents, the conversion of native files to TIFF, and the transfer of VHS tapes to DVD involved ‘copying,’ and that the costs attributable to only those activities are attributable under § 1920(4)’s allowance for the ‘costs of making copies of any materials.’”
The court also provided some comfort to parties that are concerned about being held responsible for e-discovery costs when they lose a case. The court opined that “[n]either the language of § 1920(4), nor its history, suggests that Congress intended to shift all the expenses of a particular form of discovery—production of ESI—to the losing party. Nor can such a result find support in Supreme Court precedent, which has accorded a narrow reading of the cost statute in other contexts.”
On January 31, 2012, an Oregon federal judge certified a class of commercial fishing vessels owners and fishermen who delivered whiting, groundfish, or shrimp to seafood processors from Ft. Bragg to the Canadian border. The court denied the motion to certify a subclass of whiting fisherman who delivered whiting to onshore seafood processors because the subclass had fewer than 20 members and therefore did not satisfy the numerosity requirement.
The plaintiffs alleged that defendant Pacific Seafood Group exploited its market power as a wholesale buyer to pay commercial fisherman below market prices for whiting, groundfish, and shrimp. Plaintiffs also alleged that Pacific Seafood conspired with defendant Ocean Gold Seafoods, another seafood processor, to suppress the prices paid to commercial fisherman for whiting.
A court cannot certify a class unless the plaintiff has demonstrated that the class meets all of the requirements outlined in Rule 23 of the Federal Rules of Civil Procedure. This includes the typicality requirement, which means that the claims or defenses of the representative parties are typical of the claims or defenses of the class. Here, plaintiffs relied on the “umbrella theory” of antitrust damages in order to satisfy the typicality requirement because plaintiffs did not sell to defendants. Plaintiffs argued that they suffered antitrust damages because other seafood processors followed defendants’ lead on prices. As the district court explained, under the umbrella theory a plaintiff contends that defendants’ price fixing conspiracy created a price umbrella under which non-conspiring competitors of defendants raised their prices to a level at or close to the prices fixed by the conspiring defendants. The Ninth Circuit has rejected this theory in cases involving a multi-level distribution chain and reserved ruling on the single-level distribution alleged in this case. The district court concluded that it would not “categorically reject the umbrella theory of damages” and concluded that plaintiffs had satisfied the typicality requirement. Abbey Spanier will continue to monitor this case and will update its readers if the district court issues additional opinions about the “umbrella theory.”
LCD screens are everywhere. These power-efficient, lightweight, and slim liquid crystal displays are ubiquitous in just about everything in consumer and industrial electronics these days. Televisions, cars, laptops, cell phones, computer monitors, MP3 players, and many other devices all sport LCD screens. As an example of their widespread adoption, there are no fewer than five such screens in the room where this post was written!
Now, imagine that the manufacturers of these screens have all been colluding to hold the pricing of these LCDs artificially high. Such a scheme would involve an awful lot of panels, and create an enormous amount of profit. It would affect a staggering number of consumers, businesses, and industries. It would also, of course, be completely illegal, and might have potentially ruinous effects on the conspiring companies if discovered and litigated.
Such are the facts alleged by the plaintiffs in In re TFT-LCD (Flat Panel) Antitrust Litigation, a massive multidistrict class action that targets some pretty big names in the electronics world. Included in the lengthy list of defendants are such consumer electronics heavyweights as Samsung, Sharp, LG, Chi Mei, AU Optronics, and Chunghwa. Many of these corporations are household names, and those six companies alone control over 80% of the TFT-LCD market.
The plaintiffs allege that between 1996 and 2006, the defendants formed a cartel that carefully controlled the supply and pricing of LCD screens. The defendants agreed to set prices via telephone and email correspondence, and through so-called “crystal meetings” between the management, executives, and CEOs of the various companies involved. The plaintiffs filed suit for injunctive and equitable relief, and produced voluminous evidence of collusion in the form of meeting transcripts, memoranda, and emails.
These allegations were significant enough for the Department of Justice’s Antitrust Division to get involved in 2006, and as a result of the DOJ’s investigation seven defendants (including Sharp, LG, Chunghwa, Hitachi, Epson, and Chi Mei) eventually pled guilty to Sherman Act violations related to price fixing and were forced to pay fines. However, as part of their guilty pleas, none of these defendants made or promised any sort of compensation to the consumers who were overcharged for LCD panel-equipped devices. This is where the class actions came in: to force the defendants to make restitution to the many consumers they fleeced.
In order to qualify for class certification, the plaintiffs were eventually split into two categories: those who bought the TFT-LCD panels indirectly from one of the defendants through a retailer, distributor, or other intermediary for their own use (the “indirect” plaintiffs), and those who bought the TFT-LCD panels directly from a defendant for their own use (the “direct” plaintiffs.)
In March 2010, the Northern District of California certified a nationwide class for injunctive and declaratory relief for the indirect plaintiffs, along with twenty-three separate state classes for damages according to each state’s individual laws. The direct plaintiffs’ were divided into similar classes, although there were only eight state classes in that category in addition to the national one.
Both categories and all classes included “all persons and entities” (including corporations) who bought TFT-LCD panels for their own use between January 1, 1999 and December 31, 2006. The defendants failed to prevent the class certifications, and none of their motions to dismiss were granted. As trial dates loomed closer, many defendants decided to settle. Because of the strength of the plaintiffs’ case, however, any settlement was going to cost them dearly.
At the time of writing, the Northern District has approved settlement agreements between the direct plaintiffs and ten of the twelve corporate defendants. These settlements add up to $405 million, which is a massive 14% of each settling defendant’s total volume of commerce during the class period. That’s a pretty large percentage, especially as antitrust cases go.
As if that weren’t enough, the indirect plaintiffs and the defendants have agreed upon a settlement agreement totaling $539 million subject to court approval. This means that, as of right now, the settling defendants have agreed to a $944 million total payout. This is the largest antitrust class action settlement in history!
The total dollar amount might still climb, too. Toshiba and AU Optronics have not settled and are still scheduled for trial in April.
The real kicker, though, is that on top of these unprecedented settlements, the Department of Justice has previously forced the corporations found guilty of Sherman Act violations to pay $890 million in fines. That means, with the fines and settlements taken into account, LCD manufacturers have paid out a total of $1.83 billion (plus their own attorneys’ fees) as a result of their price fixing. Considering the blatant illegality of defendants’ conduct, the sheer scale of profits from their wrongdoing, and the amount of individuals and corporations affected, this certainly appears to be a just (and warranted) result.
And, of course, it couldn’t have happened without the efficiency and judicial economy created by the class action. If you believe that a company is acting in an anticompetitive manner please contact us.
Joshua Druckerman is a second-year student at New York Law School and a member of its Law Review.
In Sullivan v. DB Investments, Inc. (“Sullivan II”), No. 08-2784, 2011 U.S. App. LEXIS 25185 (3d Cir. Dec. 20, 2011) (en banc), the Third Circuit reinstated the district court’s certification of a nationwide class settlement comprising indirect and direct purchasers of diamonds from De Beers, and approved the $295 million settlement. The Third Circuit considered whether a court must inquire into each class member’s “possess[ion of] a viable claim or ‘some colorable legal claim’” when certifying a class under Federal Rule of Civil Procedure 23. Id. at *6. The Third Circuit held that if plaintiffs can show that common factual and legal issues predominated over individual issues, the district court “need not concern itself with whether [p]laintiffs can prove their allegations.” Id. at *25–26.
The Third Circuit vacated a prior panel’s decision that rejected the instant certification because indirect purchasers did not have standing to sue in federal court or in many of the states, precluding a finding of predominance because “no question of law or fact regarding their legal rights is uniform throughout the class.” See Sullivan v. DB Investments, Inc. (“Sullivan I”), 613 F.3d 134, 148 (3d Cir. 2010) (vacated).
In Sullivan II, the plaintiffs alleged price-fixing and monopolization by De Beers in the diamond market. The plaintiffs alleged that “De Beers exploited its market dominance to artificially inflate the prices of rough diamonds.” Sullivan II, 2011 U.S. App. LEXIS 25185, at *9. They further contended that De Beers’s conduct “caused reseller and consumer purchasers of diamonds and diamond-infused products to pay an unwarranted premium for such products.” Id. The instant lawsuits were filed in the United States District Courts for the District of New Jersey and the Southern District of New York, and five other lawsuits were filed in various federal and state courts across the country. Id.
Previously, in Sullivan I, the Third Circuit panel examined the issue of standing and noted that the variance among states’ antitrust statutes “is mainly a function of whether a state has chosen to follow the Sherman Act principles regarding standing laid down by . . . Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977).” Sullivan I, 613 F.3d at 146. In Illinois Brick, the Supreme Court held that only direct purchasers had standing under the Sherman Act to sue for monetary damages deriving from an antitrust injury. And since a number of states did not have Illinois Brick repealing statutes in place, indirect purchasers were denied a right to antitrust recovery as a matter of substantive law. Therefore, the panel vacated the nationwide class certification of state indirect purchasers.
In Sullivan II, however, the Third Circuit—sitting en banc—rejected “the addition of this new requirement into the Rule 23 certification process.” Sullivan II, 2011 U.S. App. LEXIS 25185, at *6. In addressing Rule 23’s requirement of predominance, the Third Circuit noted that “variations in state law do not necessarily defeat predominance; and . . . concerns regarding variations in state law largely dissipate when a court is considering the certification of a settlement class.” Id. at *43. The Third Circuit noted that, while states abiding by Illinois Brick require a plaintiff to be a direct purchaser as an element of the claim, the likelihood that an indirect purchaser “might be unable to establish this element at trial is beside the point.” Id. at *73. The court clarified that this type of standing is not jurisdictional; here, the “lack of antitrust standing affects a plaintiff’s ability to recover, but does not implicate the subject matter jurisdiction of the court.” Id. at *72–73. “Accordingly, statutory standing is simply another element of proof for an antitrust claim, rather than a predicate for asserting a claim in the first place.” Id. at *73. Therefore, according to the Third Circuit, as long as the indirect purchasers may file lawsuits in Illinois Brick states, even though such lawsuits could easily be dismissed on a defendant’s motion, courts may include indirect purchasers in a settlement class.
But, the majority held, Rule 23 does not require an “intensive cataloguing” of each class member’s claim according to the laws of the fifty states, nor an intensive Rule 12(b)(6) analysis to ensure there is a “colorable legal claim.” Id. at *76–78.
The majority also found support in Wal-mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011):
Dukes actually bolsters our position, making clear that the focus is on whether the defendant’s conduct was common as to all of the class members, not on whether each plaintiff has a “colorable” claim. In Dukes, the Court held that commonality and predominance are defeated when it cannot be said that there was a common course of conduct in which the defendant engaged with respect to each individual. But commonality is satisfied where common questions generate common answers “apt to drive the resolution of the litigation.” That is exactly what is presented here, for the answers to questions about De Beers’s alleged misconduct and the harm it caused would be common as to all of the class members, and would thus inform the resolution of the litigation if it were not being settled.
Sullivan II, 2011 U.S. App. LEXIS 25185 at *49 (citation omitted).
This decision is favorable to defendants seeking “global peace” to settle nationwide state-law claims. But it is remains unclear whether this decision will be extended beyond claims alleging violations of antitrust or consumer fraud laws, and whether it will be extended beyond its settlement context.
David Brown is a third year student as New York Law School. He is Executive Editor of the Law Review. He has interned at the US Attorney’s Office for the Eastern District of New York and for the Honorable Joel H. Slomsky, US District Court, Eastern District of Pennsylvania.
If you believe that a company is acting in an anticompetitive manner please call us at 212-889-3700 or visit our website at www.abbeyspanier.com.
On December 2, 2011, a federal judge took the extraordinary step of issuing an advisory opinion about an area of law that has little precedent. In In re: Fresh and Process Potatoes Antitrust Litigation, No. 10-2186 (D. Idaho), plaintiffs alleged that defendants created cooperatives for the purpose of increasing the price of potatoes by limiting potato planting acreages, and by paying farmers to either destroy existing stocks or to refrain from growing additional potatoes.
When ruling on the motion to dismiss, the district court took the unusual step of including in the decision an advisory opinion about whether the Capper-Volstead Act immunizes defendants from Sherman Act liability. The court was willing to take this step because: there were no disputed issues of fact; the parties briefed and argued an area of law where case law is scant; and if this issue was not resolved at this stage of the litigation, it would cause the parties to incur unnecessary expenses.
The Capper-Volstead Act was enacted in the early 1900’s and provides agricultural cooperatives with a limited exception from the antitrust laws. The district court explained that the Capper-Volstead Act and “its legislative history indicate a purpose to make it possible for farmer-producers to organize together, set association policy, fix prices at which their cooperatives will sell their produce, and otherwise carry on like a business cooperative without violating the antitrust laws.”
The district court held that the Capper-Volstead Act does not protect pre-production agricultural output limitations such as coordinating and reducing acreage for planting. Defendants argued that because Capper-Volstead cooperatives are allowed to fix prices, they must also be permitted to restrict production. The district court responded that the “reason an agricultural cooperative can fix the price at which their good is sold is because if the prices rises, farmers will produce more and consumers will not be overcharged. Individual freedom to produce more in time of high prices is a quintessential safeguard against Capper-Volstead abuse, which Congress recognized in enacting the statute.”
This decision will likely have an impact on similar litigation against dairy cooperatives, as well as antitrust cases that are pending in the egg and mushroom industries, and we will be following these developments.
|Walmart too small? That’s the verdict of Judge Phyllis Hamilton of the Northern District of California in a class action suit against the retailer and Internet movie house Netflix. According to Judge Hamilton, a marketing agreement between the two companies was outside the scope of the Sherman Antitrust Act because Walmart’s DVD rental business was too tiny to affect the market for online movies.
Plaintiffs alleged that a 2005 “Promotion Agreement” between the companies was an attempt to allocate the DVD market in violation of sections 1 and 2 of the Sherman Act. The agreement called for Walmart to end its online movie rental business, while Netflix would promote Wal-Mart’s offerings of DVDs for-sale.
In granting Netflix’s motion for summary judgment last week, Judge Hamilton relied on the Ninth Circuit’s recent decision in California ex rel. Harris v. Safeway, which held that an agreement did not violate the Sherman Act when it left the parties free to engage in the business at a later date. In this case, “the Promotion Agreement does not restrict or prevent Netflix from engaging in the sale of new DVDs, nor does it prevent Walmart from re-entering the online DVD rental market.”
Additionally, in keeping with Safeway, Judge Hamilton ruled that the plaintiffs had failed to demonstrate that the Agreement would have a negative effect on competition because Walmart’s roughly 57,000 subscribers were “outnumbered by Netflix’s subscriber base by a factor of 39.” Moreover, plaintiffs’ evidence did not show that the companies’ CEOs understood the agreement to be a quid-pro-quo. “[T]he evidence fails to definitively suggest that Walmart’s decision to exit the online DVD rental market was not truly independent,” Judge Hamilton wrote.
Having failed to show the Agreement was a pro se violation of the Act, the plaintiffs next turned to the “rule of reason,” which states that activities may violate the Sherman Act when “anticompetitive aspects of the challenged practice outweigh precompetitive effects.” The plaintiffs claimed that Netflix would have lowered its subscription prices in the absence of an agreement with Walmart. However, Judge Hamilton found that there was no evidence that Netflix felt threatened by Walmart’s miniscule DVD rental business or that Walmart’s presence in the market swayed Netflix’s choices over pricing. As a result, the plaintiffs could not show an injury in-fact, which is a necessary element of a claim under section 1 of the Sherman Act.
For the same reasons, Judge Hamilton granted summary judgment in favor of the defendants on the section 2 claims, which require a showing that defendants held monopoly power over the market.
Prior to Judge Hamilton’s decision last week, Walmart had already agreed to settle with plaintiffs over its half of the case for $27.5 million. Netflix members who subscribed between May 19, 2005 and Sept. 2, 2011 are eligible to participate in the settlement.
Nicholas Turner is a third year law student at New York Law School. He is a Notes & Comments editor of Law Review and a John Marshall Harlan Scholar. Mr. Turner came in second in the 2011 ABA Torts, Insurance, and Compensation Law Section Writing contest. He was a 2011 Review Editor of the school’s Global Human Rights Bulletin. Mr. Turner is proficient in French.
On November 26, just days after lawyers for the NBA players withdrew their class action antitrust complaint in California and moved to consolidate their claims in a Minnesota Federal court, the NBA and its players announced a new labor deal. After five months of unsuccessful labor discussions between NBA owners and the NBA Players Association (NBPA), the players’ decision to disclaim the union as its collective bargaining representative and sue in federal court seems to have been the driving force behind the settlement. While fans will be happy to watch their teams compete in a truncated 66-game season beginning Christmas day, the lesson for lawyers and law students seems to be that class action lawsuits can be a powerful tool for resolving stalemated labor disputes.
According to the players’ amended complaint filed in the Federal District of Minnesota, the labor dispute began in June 2007, more than four years prior to the expiration of a 2005 Collective Bargaining Agreement (CBA). According to the complaint, it was at that time that the owners announced their intention “to substantially reduce the players’ share of Basketball Related Income (BRI), to impose more restrictive ‘salary cap’ limits on players’ individual salaries and competitive opportunities, and to remove or restrict a number of important ‘system’ provisions to protect player rights.” Although formal labor discussions began in 2009, they were unsuccessful and on “July 1, 2011, immediately upon the expiration of the 2005 CBA, and while negotiations concerning a new CBA were continuing, Defendants [the NBA owners] unilaterally imposed a lockout.”
Despite the lockout, the players, through the NBPA, and the owners continued to negotiate through November 1, which was supposed to be opening day for the 2011 season. The main debate was over how much the players would reduce their share of BRI from the former CBA, which was 57%. Although the players made concessions, such as “agreeing to entertain a reduction in player salaries to 50% . . . if the NBA would forego certain demands,” the NBA refused. On November 14, pursuant to a unanimous vote of the Board of Player Representatives, the “NBPA disclaimed its role as the players’ collective bargaining representative.”
On November 15, a complaint was filed on behalf of Carmelo Anthony of the New York Knicks and four other athletes in federal court in Oakland, California, while Anthony Toliver of the Minnesota Timberwolves and other players filed a second suit in Minneapolis. On November 21, after the California case was assigned to a new judge in San Francisco and first appearances were scheduled for March 12, 2012, the players’ attorney consolidated the lawsuits in Minnesota with Anthony as the lead plaintiff.
The complaint alleges that, in instituting the lockout, the 30 NBA member teams and their owners, “orchestrated a group boycott” against the players, constituting an “illegal agreement among competitors . . . to eliminate competition . . . and to refuse to pay contractually owed compensation to players under contract . . . in violation of Section 1 of the Sherman Act.” The complaint also alleges that the group boycott “constitutes an unreasonable restraint of trade under the rule of reason,” as well as breach of contract, tortious interference with prospective contractual relations (for a subclass of players or potential players not under contract), and tortious interference with contract. Complicating the players’ class action was the fact that before instituting the lockout, the NBA filed its own action in the Southern District of New York seeking declaratory relief that the lockout was legal and exempt from antitrust lawsuits.
Given the recent announcement that the NBA and the players have reached a deal, both suits are now moot. Unfortunately, lawyers and law students who would have eagerly followed the litigation will have to wait until the next major sports uprising to fulfill their intellectual curiosity. This is particularly disappointing because the lawsuits would have raised several interesting questions of law and legal strategy that would have been worth following.
First, it would have been interesting to see if the three subclasses of players (those under contract, free agents, and those eligible to play in the NBA – the “Rookies”) would have been certified. Because these categories are readily definable, the answer almost certainly would have been yes. Second, and more complicated, is whether the players actually advanced a viable cause of action for antitrust under the Sherman Act. As evidenced by their preemptive suit for declaratory relief, the NBA clearly believed its actions were legal, while the players’ lawsuit demonstrates equally strong conviction.
The two lawsuits would also have raised interesting procedural questions regarding venue and litigation strategy. For example, because the NBA filed first, it would likely have argued that the Minnesota action should be stayed until a decision is reached in New York. Meanwhile, the players contended that the NBA’s first filing was premature or “unripe” as a case or controversy and, therefore, the Minnesota action should control and the New York action be dismissed. Although the actions would probably have been consolidated, it would have been interesting to watch each side’s strategy and to see each court’s disposition of these matters.
Although not seeing the case litigated is a disappointment for many lawyers and law students, hopefully the litigants and fans are happy that a settlement (which includes a 50-50 split of BRI) has been reached. While lawyers and law students await the next major sports uprising to see whether a lockout violates the Sherman Act, for now, they should be content in knowing that an antitrust class action suit can be a very effective tool for obtaining settlement in stalemated labor discussions—and that is a very important lesson.
David T. Henek is a third year law student at New York Law School. He is an Articles Editor of the Law Review. His activities include serving as a student advocate for the school’s Civil Rights Clinic (Employment Discrimination/Juvenile Rights) and Unemployment Action Center.
In 1982, Congress enacted the Foreign Trade Antitrust Improvements Act of 1982, 15 U.S.C. §6(a) (the “FTAIA”). The FTAIA places a limit on the reach of U.S. antitrust laws by stating that the Sherman Act “shall not apply to conduct involving trade or commerce with foreign nations.” There are two exceptions to this rule which are when the conduct either: (i) involves “import trade or import commerce” or (ii) has a “direct, substantial, and reasonably foreseeable effect” on domestic commerce.
Until this past summer, courts generally treated the FTAIA as a limitation on the subject matter jurisdiction of federal courts, as demonstrated in the Seventh Circuit’s decision United Phosphorus, Ltd. v. Angus Chemical Company, 322 F.3d 942 (7th Cir. 2003). Defendants would typically bring motions to dismiss for lack of subject matter jurisdiction under Rule 12(b)(1) of the Federal Rules of Civil Procedure. However, since August 2011, that practice has changed in the Third Circuit as a result of the court’s class action decision in Animal Science Products, Inc. v. China Minmetals, No. 10-2288, 654 F.3d 462 (3d Cir. 2011).
Third Circuit FTAIA challenges are now considered “a substantive merits limitation rather than a jurisdictional bar.” This means that defendants will carry the burden under the procedural framework of a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), where a court generally must accept all the facts alleged in the complaint as true. This is in sharp contrast to the prior practice of reviewing FTAIA challenges using the framework of a jurisdictional bar under Rule 12(b)(1), where the plaintiff has the burden and the court can review evidence and resolve factual disputes.
Abbey Spanier will monitor whether more complaints, particularly class action complaints, survive motions to dismiss in the Third Circuit and throughout the country as a result of the ruling in Animal Science.
Abbey Spanier, LLP is located in New York City, is a well recognized national class action and complex litigation law firm.
We previously blogged about the high prices consumers pay for their medications and explained how the cost can drop significantly once a generic version is available. The FTC’s August 31, 2011 final report on authorized generics, entitled “Authorized Generic Drugs—Short-Term Effects and Long-Term Impact”, sheds new light on the high cost of drugs. The FTC’s study of generic drugs was spurred by the requests of Senators Grassley, Leahy, and Rockefeller, and Representative Waxman in 2005.
The FTC report has four main findings:
In other words, the branded firm “buys” time to continue selling its drug until the non-compete expires. During that time, consumers continue to pay the high cost for the branded drugs rather than the lower cost of generics.
After the report was released FTC chairman, Jon Leibowitz, said in an interview that it’s a “Win-win for the companies, but lose-lose for consumers.” Mr. Leibowitz explained that “Instead of saying, ‘Here’s $200 million, go away,’ they’re saying they could penalize them $200 million, but they won’t so go away.”
Abbey Spanier, LLP is located in New York City, is a well recognized national class action and complex litigation law firm.
That’s a question that five U.S. Senators are asking the Federal Trade Commission to answer. On Tuesday, Senators Harry Reid, Charles Schumer, Patty Murray, Dick Durbin, and Claire McCaskill sent a letter to the FTC to look into the potential price fixing of gasoline by U.S. refiners.
The senators are concerned about recent reports suggesting that refiners are reducing U.S. gasoline stockpiles in order to artificially keep prices high as well as inflate their bottom line. According to the Energy Information Administration, U.S. refiners are only using 81.7% of their capacity, which is a decline of 7% from last year. The senators wrote that “while some have argued that this increase is due to potential impacts from recent flooding along the Mississippi River, this cannot justify the steady increases in their margins since January of this year.”
Unsurprisingly, President of the National Petrochemical & Refiners Association, Charles Drevna, issued a statement that was critical of the senators’ letter. Drevna argued that the letter was “political theater” and that “dozens of investigations of gasoline price fixing over the years have generated plenty of headlines and political hyperbole, but have failed again and again to find any evidence of wrongdoing.”
Abbey Spanier will continue to monitor these developments and will let you know if the FTC beings an investigation into U.S. refiners.
If you are a CVS Caremark customer, be on the lookout for anti-consumer practices identified by five respected consumer groups who recently asked the Federal Trade Commission to unwind the CVS Caremark Corp. merger. In an April 14, 2011 letter, they say there is “strong evidence” of CVS Caremark’s harm to consumers. Examples include:
-Using confidential patient information collected by Caremark (a pharmacy manager) so CVS pharmacists can solicit non-CVS customers by mail and phone and direct them to fill their prescriptions at CVS stores;
-Switching Medicare beneficiaries to CVS stores with an increased co-pay and bringing them to the Part D “donut” hole” (when they must pay out of pocket) prematurely; and
-Using the “Maintenance Choice” program which forces consumers to fill their prescriptions at CVS stores or by mail, in order to avoid paying an increased co-pay to fill their 90 day or maintenance prescriptions at non-CVS locations.
The consumer groups highlighted the widespread impact these practices can have, given that CVS Caremark deals with over 40% of all consumers.
The FTC is reportedly investigating these practices and, according to CVS Caremark, attorneys general in 24 states are conducting similar investigations.
Abbey Spanier will continue to monitor these investigations and will report any significant developments.
The U.S. Court of Appeals for the Second Circuit dealt yet another blow to the enforceability of the increasingly common class arbitration waiver provision in its recent March 8, 2011 ruling in In re: American Express Merchants’ Litigation, No. 06-1871-cv.
A class arbitration waiver provision requires parties to the agreement to proceed with arbitration on an individual basis, rather than on a representative basis or a class basis. They are often paired with a mandatory arbitration provision requiring parties to arbitrate disputes with mediators rather than litigate them in court as in the agreement at issue in In re: American Express Merchants’ Litigation.
The “conundrum” this particular class arbitration waiver provision presented, as the Court explained, was “whether the mandatory class action waiver in the Card Acceptance Agreement is enforceable even if the plaintiffs are able to demonstrate that the practical effect of enforcement of the waiver would be to preclude their bring Sherman Act claims against Amex in either an individual or collective capacity.” Slip op. at 15.
Although the Court did not conclude that class action waivers in arbitration agreements are per se unenforceable or that they are per se unenforceable in the context of antitrust actions, it did find that this particular provision was unenforceable, largely affirming its earlier ruling in In re: American Express Merchants’ Litigation, 554 F.3d 300 (2009). The Court’s reasoning in its most recent ruling begins with the recognition that class action lawsuits are well-recognized by the Supreme Court as a vehicle for vindicating statutory rights, which is especially true when a large group of individuals has suffered an alleged wrong, but the damages due to any single individual or entity are too small to justify bringing an individual action.
Plaintiffs presented evidence that the cost of litigating their claims more than eclipsed the awards to which they would be entitled if they were successful, and the Court found that “Amex has brought no serious challenge to the plaintiffs’ demonstration that their claims cannot reasonably be pursued as individual actions, whether in federal court or in arbitration”. Slip op. at 20. As a result, the Court found that “enforcement of the class action waiver in the Card Acceptance Agreement flatly ensures that no small merchant may challenge American Express’s tying arrangements under the federal antitrust laws.” Id. The Court explained that “[e]radicating the private enforcement component from our antitrust law scheme cannot be what Congress intended when it included strong private enforcement mechanisms and incentives in the antitrust statues.” Id. “Thus,” the Court ultimately held, “as the class action waiver in this case precludes plaintiffs from enforcing their statutory rights, we find the arbitration provision unenforceable.” Id.
Several months ago, we wrote about a bill called the “Preserve Access to Affordable Generics Act.” This bill was developed to end the drug industry practice of paying off manufacturers of generic drugs because it delays the public’s access to lower cost generic drugs. The pay-for-delay practice is back in the spotlight because President Obama recently proposed, in the 2012 budget, to ban this practice. This proposal would save the U.S. $540 million in 2012 and approximately $8.8 billion through 2021. The budget also contains a proposal to limit the amount of time that brand name drug makers have marketing exclusivity. Under the current law, brand name drug makers have 12 years of marketing exclusivity and the proposal would limit this time period to 7 years. According to the Obama administration, this change would save the U.S. $80 million beginning in 2015 and could result in savings of $2.3 billion from 2012 to 2021.
The White House argued in budget documents that these proposals are a way “to increase availability of generic drugs by providing the Federal Trade Commission authority to stop drug companies from entering into anticompetitive agreements intended to block consumer access to safe and effective generics, and hastening availability of generic biologics while retaining the appropriate incentives for research and development for the innovation of breakthrough products.”
These proposals will face an uphill battle if they are to remain in the budget. Because these proposals are aimed at providing consumers with cheaper generic medications, it is not surprising that they were immediately met with criticism by the pharmaceutical industry. For example, a Pharmaceutical Research and Manufactures of America press release stated that “the President’s proposed restrictions on certain types of patent settlements could reduce incentives for future medical innovation.”
Abbey Spanier will continue to monitor these proposals and will report any significant developments.
Recently, in an opinion written by Judge Richard Posner, the U.S. Court of Appeals for the Seventh Circuit affirmed a district court’s refusal to dismiss a class action complaint alleging that cell phone companies conspired to fix text message prices in violation of the Sherman Act. The Court of Appeals provided much needed clarification about pleading standards in light of the U.S. Supreme Court’s decisions in Ashcroft v. Iqbal and Bell Atlantic Corp. v. Twombly. This clarification was provided in a section 1292(b) interlocutory appeal by defendants in In re Text Messaging Antitrust Litig., No. 10-8037. The Court of Appeals agreed to accept the appeal because “[p]leading standards in federal litigation are in ferment after Twombly and Iqbal and therefore an appeal seeking a clarifying decision that might head off protracted litigation is within the scope of 1292(b).”
The Court of Appeals agreed with the district judge that the complaint alleged a conspiracy with sufficient plausibility to satisfy the Twombly pleading standard and permitted the plaintiffs to proceed with discovery. The plaintiffs alleged that defendants engaged in parallel behaviors and were members of a trade association and exchanged price information directly at the trade association meetings. The complaint also alleged that despite steeply falling costs defendants increased their prices and adopted a uniform pricing structure. These allegations, along with others, were enough for the court to conclude that the complaint alleged a sufficiently plausible case of price fixing.
The cell phone companies argued that plaintiffs had not alleged the “smoking gun” in a price-fixing case, which is direct evidence such as an admission by a conspirator that the defendants met and agreed to raise text messaging prices. The Court of Appeals clarified that direct evidence isn’t required and circumstantial evidence can establish a conspiracy at the pleading stage.
In Leegin Creative Prods., Inc. v. PSKS, Inc., a 5-4 decision it issued three years ago, the Supreme Court overturned the 100 year-old decision Dr. Miles Medical Co. v. John D. Park & Sons Co., which held that it was per se unlawful for manufacturers and distributors to agree on minimum retail prices under federal antitrust law. In Leegin, the Supreme Court ruled that manufacturers’ agreements with resellers that establish minimum resale prices should be evaluated under the rule of reason which permits the agreements as long as they encourage competition. Some have argued that applying the rule of reason to these agreements has effectively made them lawful. In his Leegin dissent, Justice Breyer estimated that the Court’s decision would result in retail prices rising by “roughly $750 to $1,000 annually for an American family of four.”
In the wake of the Leegin decision, consumer advocates have noticed the increased use of these types of agreements and that consumers have been negatively impacted, especially in the markets for consumer electronics, baby goods, home furnishings, and pet food.
On November 15, 2010, the clothing boutique Kay’s Kloset, the losing party in the Leegin decision, filed a petition with the Supreme Court asking the Court to revisit that case. Kay’s Kloset argues that the U.S. Court of Appeals for the Fifth Circuit improperly applied the rule of reason in dismissing its complaint on remand. Counsel for Kay’s Kloset includes Einer Elhauge, an antitrust expert and Harvard law school professor who, according to the Wall Street Journal, accepted the case on a pro bono basis because he is so concerned with the direction many lower court decisions have taken in applying the Supreme Court’s Leegin decision.
Kay’s Kloset argues that the lower courts have read Leegin in such a way as to allow manufactures to freely fix prices. Kay’s Kloset contends that the Fifth Circuit’s decision created conflicts among the circuits over issues of market definition, market power, rule of reason review, and horizontal agreements. According to the petition, these conflicts “sweep beyond vertical price restraints to disrupt antitrust enforcement on mergers, cartels, monopolization, and all other areas of antitrust.” Kay’s Kloset asserts that the petition raises the fundamental question, “will modern antitrust jurisprudence live up to its aspiration of replacing arid formalisms with sound economics, or will it have the more dismal legacy of replacing pro-plaintiff formalisms with new pro-defendant formalisms equally lacking in economic merit?” If the Supreme Court decides to review the Fifth Circuit’s decision, it will undoubtedly impact consumers for years to come.
Soon Congress may pass a bill called the “Preserve Access to Affordable Generics Act.” This bill was designed to end the practice of Big Pharma companies protecting profits from major brand name drugs by paying off generic manufacturers to delay the public’s access to lower cost generic drugs. The adverse impact of this practice on consumers’ ability to obtain low cost drugs is great. According to the Federal Trade Commission, the so-called reverse payment settlements in patent lawsuits (typically brought by brand name pharma companies against generic companies that file Abbreviated New Drug Applications (ANDA) with the FDA in anticipation of marketing a generic drug when the branded version’s patent is about to end) delay the entry of generic drugs to the market for approximately 17 months at a cost to consumers of $3.5 billion per year. See Pay for Delay, How Drug Company Pay-Offs Cost Consumer’s Billions http://www.ftc.gov/os/2010/01/100112payfordelayrpt.pdf. The Congressional Budget Office estimates that banning these payments could save the federal government $1 billion during the next five years and $2.7 billion during the next 10 years.
The bill will protect consumers by permitting the FTC to treat as presumptively anti-competitive any settlement in which the generic manufacturer receives anything of value and the generic manufacturer agrees to limit or forego the research, development, manufacturing, marketing or sales of its product for any period of time unless the parties to the agreement demonstrate by clear and convincing evidence that the pro-competitive benefits of the agreement outweigh the anticompetitive effects of the agreement.
Despite the projected cost savings to the public and government, it is far from certain if this bill will ever become law. The U.S. House of Representatives passed the measure in July by a vote of 239 to 182. The companion bill in the Senate awaits a full vote. This bill, however, continues to come under attack by the pharmaceutical industry. Recently, a study funded by the Pharmaceutical Research and Manufacturers of America argued that the cost savings projected by the Congressional Budget Office was based on a flawed analysis and overstated the savings that would result from restricting reverse payment settlements. The debate surrounding this bill will continue for some time. If this legislation is not passed, consumers and health care plans will continue to bring class actions in courts across the country in order to stop these reverse payments.
Abbey Spanier will continue to monitor the pending legislation and will report any significant developments.