Blawgletter®

Price-Fixing Claims Parry Field Preemption in Supreme Court

Pre-emption? Ha!

A 7-2 split on the U.S. Supreme Court last week revived state-law antitrust claims against natural-gas pipelines. End-user (or retail) customers alleged that the pipelines conspired to rig index prices and thus inflate sales prices. The ruling gave narrow play to the pipelines' "field pre-emption" defense. The Court held that a federal agency's power under the Natural Gas Act to regulate any "practice" that affected wholesale prices to resellers did not pre-empt the claims. ONEOK, Inc. v. LearJet, Inc., No. 13-271 (U.S. Apr. 21, 2015).

The decision plainly will help plaintiffs who bring claims under state law to fend off federal pre-emption defenses. But it may also aid those who bring federal-law claims that defendants contend Congress tacitly pre-empted.

Gas, gas, gas

Under the Natural Gas Act of 1938, the Federal Energy Regulatory Commission (FERC) had and has the power to make rules and issue orders relating to some, but hardly all, aspects of the domestic gas industry. FERC's authority has notably included a role in regulating prices that interstate pipelines charge to utilities and other middlemen. But over the years FERC has done less and less of that.

In the 1970s, with prodding from Congress, FERC began to shed its function as the setter of prices that pipelines could pay and charge. Yet FERC remained a hovering presence in the gas industry, although now it mainly aimed to  assure that pipelines didn't garner too much power in individual gas markets.

A flood of sales to wholesale (reseller) and retail (end-user) purchasers ensued. The deluge in turn led to use of more or less local indices as pricing benchmarks. The index price in theory reflected actual, arm's-length transactions, and it often found its way into private contracts as a presumably objective proxy for the market price.

Rigging the market

But reality didn't match the theory or the presumption. People manipulated the indices. As the Court noted, "sometimes those who reported [pricing] information simply fabricated it". ONEOK, slip op. at 7. Other times, it pointed out, parties reported prices from "wash" trades, which had no substance. Id.

FERC had snapped to the manipulation by 2003 -- including as the result of the California electricity crisis of 2000-2001. By then, gas prices had more than tripled. Suspecting foul play, several groups of retail buyers sued, alleging a conspiracy to inflate gas prices through (among other means) rigging of price indices. They claimed violation of state antitrust laws only.

Dismissal and reversal

The defendants' having removed the cases to federal court, the district judge (in Nevada) who got all of them granted a motion to dismiss. He held that the NGA pre-empted the "field" and therefore barred antitrust claims that would have the (indirect) effect of regulating wholesale prices of natural gas. The fact that the plaintiffs limited their claims to retail prices, which FERC did not have jurisdiction to regulate, did not matter to the court. The practices in question affected prices at both levels, and the claims "aimed at" entities -- interstate pipelines -- over which FERC had regulatory jurisdiction and authority.

The Ninth Circuit reversed. The Supreme Court granted review. It affirmed the court of appeals decision.

Issues

The 7-2 majority, with Justice Breyer writing for it, leaned heavily on the fact that Congress left much of the natural-gas industry to state oversight, putting only the interstate transportation part under FERC's suzerainty. "Accordingly," Justice Breyer wrote, "where (as here) a state law can be applied to nonjurisdictional as well as jurisdictional sales, we must proceed cautiously, finding pre-emption only where detailed examination convinces us that a matter falls within the pre-empted field as defined by our precedents." ONEOK, slip op. at 10-11.

That "detailed examination" did not persuade the Court. "Antitrust laws", Justice Breyer noted, "are not aimed at natural-gas companies in particular, but rather all businesses in the marketplace." Id. at 13. Under the Court's precedents, that meant the state-law claims could avoid pre-emption so long as they dealt with conduct that fell at least partly within state authority and did not "aim" to regulate the pipelines as pipelines. Because the retail buyers' lawsuits did not "seek to challenge the background marketplace conditions that affected both jurisdictional and nonjurisdictional rates", the NGA did not pre-empt them under a "field pre-emption" theory. Id. at 15.

Scalia dissent

Justice Antonin Scalia's dissent, which Chief Justice John Roberts joined, painted the pre-emption issue as a simple question of whether Congress gave FERC the sole power to regulate wholesale prices. "Because the Commission's exclusive authority extends to the conduct challenged here," he concluded, "state antitrust regulation of that conduct is preempted." Id. at 3 (Scalia, J., dissenting).

Upshot

ONEOK will have three main effects.

Most obviously, the pro-plaintiff outcome will help LearJet and the other end-users who brought or who will (by way of the class action mechanism) benefit from the litigation. Yet they have miles to go before they sleep. A "conflict pre-emption" attack awaits them upon their return to the district court.

Second, ONEOK will aid other plaintiffs who assert state-law antitrust and other claims that may impinge on the subject matter of federal regulation. Areas include these:

• telecommunications (some of which the Federal Communications Commission oversees),
• banking (the Federal Reserve);
• public trading of securities (the Securities and Exchange Commission);
• air transportation (Federal Aviation Administration);
• pharmaceuticals and medical devices (Food and Drug Administration);
• workplace safety (Occupational Safety and Health Administration); and
• healthcare (Department of Health and Human Services).

Whether ONEOK makes a difference in a particular context will depend partly on how much leeway Congress left states for regulation of the subject matter and -- assuming Congress left some room for state involvement -- partly on the result of the "detailed examination" of which Justice Breyer spoke.

Finally, the Court's 7-2 rejection of Justice Scalia's sweeping view of field pre-emption should imply a softening of the Court's "implied repeal" doctrine, which hypothesizes that a "plain repugnancy" between two federal statutes requires that one of the two give way. The Court in Credit Suisse, with Justice Breyer again the author, seemed too quick to find a conflict between securities and antitrust law.^** Justice Breyer's more modest approach in ONEOK may help confine Credit Suisse to its facts.

__________________

^* See Credit Suisse Securities (USA) LLC v. Billing, 551 U.S. 264 (2007) (holding that SEC's authority to regulation initial public offerings of stock under federal securities law trumped claim under federal antitrust law that investment banks conspired to rig terms for providing IPO services). 

^** See Jesse W. Markham, Jr., The Supreme Court's New Implied Repeal Doctrine: Expanding Judicial Power to Rewrite Legislation Under the Ballooning Conception of "Plain Repugnancy", 45 Gonzaga L. Rev. 437 (2009/10).

 

High Court Rejects State-Action Defense in Teeth-Whitening Case; State -- Not Fox -- Must Guard Henhouse

State action?

The U.S. Supreme Court ruled today that a North Carolina board's ban on cheap teeth-whitening by non-dentists may expose the board's members to a federal antitrust claim despite the board's status as a creature of the state. N. Carolina State Board of Dental Examiners v. FTC, No. 13-534 (U.S. Feb. 25, 2015).

The 6-3 Court stressed that the "state-action" defense to Sherman Act claims may not apply "when the State seeks to delegate its regulatory power to active market participants". Id. at 8.

The decision invites extra scrutiny -- a drilling down if you like -- on actions by politically unaccountable entities that use the power of the state to brush away competition.

Making teeth whiter

The case that the Court bit into started when dentists in the Tar Heel State complained about non-dentists who sold teeth-whitening services. The North Carolina State Board of Dental Examiners diagnosed the upstarts as a competitive threat and reacted by sending "cease and desist" letters to dozens of the chopper-glossers. "These actions had the intended result. Nondentists ceased offering whitening services in North Carolina." Id. at 3.

That provoked a snarl at the Federal Trade Commission. The FTC extracted an order from an administrative judge against the Board under section 5 of the Federal Trade Commission Act, 15 U.S.C. 45, which declares unfair methods of competition "unlawful". The Board's toothless defense lost all the way to the Fourth Circuit, which upheld the FTC's order prohibiting further efforts to suppress the provision of dazzling smiles by persons who don't have a dental license.

The Board's appeal to the Supreme Court

The case as it landed in the Supreme Court raised the question of whether the Board could invoke "the doctrine of state-action antitrust immunity as defined and applied in this Court's decisions beginning with Parker v. Brown, 317 U.S. 341 (1943)." Id. at 1. The core of the doctrine, the Court noted, allows states to "impose restrictions on occupations, confer exclusive or shared rights to dominate a market, or otherwise limit competition to achieve public objectives." Id. at 5. Thus, "the Court in Parker v. Brown interpreted the antitrust laws to confer immunity on anticompetitive conduct by the States when acting in their sovereign capacity." Id.

But what if a state smiles on a "nonsovereign actor controlled by market participants" by allowing it to wield the state's sovereign power? In that situation, the Court pointed out, the actor "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."'" Id. at 6 (quoting FTC v. Phoebe Putney Health Sys., Inc., 133 S. Ct. 1003, 1010 (2013)).

No active supervision

The case turned on the "actively supervised by the State" prong of the Parker test. The majority -- per Justice Anthony Kennedy -- had little trouble concluding that North Carolina did not engage in active supervision of the cease-and-desist letter campaign. "[T]he Board relied upon cease-and-desist letters threatening criminal liability, rather than any of the powers at its disposal that would invoke oversight by a politically accountable official." Id. at 17. The Board's method thus eschewed a decision by a "politically accountable" person in state government on whether or not to allow the Board's treatment of teeth-whitening by non-dentists as the illegal practice of dentistry.

Dissent

The three most conservative justices dissented. Justice Sam Alito led the frowners, contending that the majority had taken "the unprecedented step of holding that Parker does not apply to the North Carolina Board because the Board is not structured in a way that merits a good-government seal of approval". Id. at 1 (dissent). The fact that the Board "is made up of practicing dentists who have a financial incentive to use the licensing laws to further the financial interests of the State's dentists" did not matter, in Justice Alito's view. Id. So long as the state clothed the Board with the power to do what it did, Parker braced its actions with antitrust immunity, regardless of the anticompetitive motives or effects.

Impact

The decision in North Carolina Board picks on regulatory entities that "market participants" control. That class bridges a range of quasi-governmental units, including bar associations, medical boards, and hospital authorities. These regulators typically oversee specific trades and professions, and their actions can make the difference between crowning success and economic decay. Their actions -- particularly enforcement actions that "politically accountable" persons in government do not participate in or approve -- will now come under closer probing.

Why Comcast Corp. v. Behrend Went Off the Air

In Roach v. T.L. Cannon Corp., No. 13-3070-cv (2d Cir. Feb. 10, 2015), the Second Circuit gave a narrow reading of the Supreme Court's ruling on class certification in Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013).^*

The outcome does not surprise Blawgletter, who had the honor of arguing Comcast Corp. v. Behrend on behalf of class plaintiffs. In view of Comcast's provenance, it should not surprise anyone else either.

After losing in the courts below, Comcast sought review on the question of whether the Third Circuit and the district court erred by failing to grapple with the "merits", but the Court granted cert. on another issue, one that it had expressly reserved the year before (2011) in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011) -- whether class plaintiffs must meet the Daubert test if they rely on expert proof to establish damages.

But the Court seems not to have realized that Comcast hadn't raised the Daubert issue in the district court or the court of appeals, that Comcast had as a result "forfeited" any objection to admissibility of our damages expert's opinions, and that the case therefore "would give lower courts scant guidance . . . in the great majority of cases" involving class certification. Respondents' Br. at 19.

The mismatch between the case that the Court thought it had and the one that it actually faced became more salient during oral argument. That apparently led to an impromptu post-argument meeting of the justices and a rewrite of the Question Presented; the revision in turn prompted a dual dissent, which Justices Ginsburg and Breyer delivered on the morning of the first arguments in the Obamacare cases.

At the Court, the history of the Comcast case had the effect of barring a reversal unless the Court could conclude that the class expert's testimony in no way tended to show damages, class-wide or otherwise. The majority did reach that conclusion, but it had to determine (in our view, contrary to the district court's findings and the evidence) that the damages expert tried to link damages to specific anti-competitive conduct but failed. (The liability expert did make the causal connection, but because of how the Court had re-framed the Question Presented, the briefing and argument did not explore the sufficiency of that important part of the record, which in any event did not support the Court's reading of the evidence.)

Almost all of the courts interpreting Comcast have correctly appreciated the narrowness of the Court's holding. While Blawgletter respectfully disagrees with the majority's conclusion that class plaintiffs did not present evidence linking anti-competitive conduct with class-wide damages, the case stands for that conclusion and nothing more.

We therefore think that the Second Circuit certainly reached the right conclusion yesterday when it held just that in Roach v. T.L. Cannon Corp.

_____________________

^{* For an overview of the Second Circuit case, which involved wage and hour claims by Applebee's employees, see Alison Frankel, The Supreme Court's class action underachiever", Feb. 11, 2015, Reuters.}

GM Rebate Saves Parts Seller from Below-Cost Predatory Pricing Claim, Fifth Circuit Rules

A beastly hard theory

The latest antitrust ruling by the Fifth Circuit favors a giant, General Motors, despite its huge share of the parts market that the plaintiff accused it of monopolizing. But the case says less about the Fifth Circuit's pro-defense leanings than it does about the steep odds against predatory-pricing cases in general.

The case

In Felder's Collision Parts, Inc. v. All Star Advertising Agency, Inc., No. 14-30410 (5th Cir. Jan. 27, 2015), the panel looked at whether the plaintiff Felder's had alleged a plausible antitrust claim. Felders alleged that a GM parts dealer, All Star, had engaged in below-cost pricing in order to drive out rivals like Felder's.

Speaking through Judge Gregg Costa -- the Fifth Circuit's newest member and a very bright fellow indeed -- the court agreed with a Louisiana district judge that Felder's could never prevail on its claim. A predatory pricing theory, the court noted, requires that the defendant sell something at less than "average variable cost", aiming to starve competitors of profits and later (after they die or quit) to recoup the losses by charging monopoly prices. Felder's, slip op. at 5 & 8. 

Rebate saves the day

But the GM parts dealer didn't charge less than its cost. Although All Star and others in GM's "Bump the Competition" program did undercut Felder's pricing and in doing so charged less than what they paid GM for the parts, GM gave the dealers rebates that turned nominal losses into real profits.

An alternative?

Why, you might ask, didn't Felder's complain about GM's prices instead of the dealers'? The panel wondered the same thing:

[I]t would seem that a successful predatory pricing scheme of this nature would primarily benefit GM by driving aftermarket equivalent parts from the market. But Felder’s has never alleged that GM is selling parts below its costs, focusing instead on allegations that GM dealer All Star is selling parts at prices below its costs. The viability of Felder’s claims thus turns on whether it can show that All Star is engaged in predatory pricing at the dealer level.

Felder's, slip op. at 6-7.

So why did Felder's limit its claim to the prices dealers charged? The likely answer arises from a simple fact about predatory pricing claims. If the claim had focused on what GM charged its dealers, Felder's would have had to show that GM's average variable cost of making the parts exceeded what GM sold the parts for. That task would require details about GM's manufacturing processes for multiple parts, reports and testimony by an economics expert or two, and hundreds of thousands of dollars in expense. Far better to cite the delta between the nominal price that dealers paid GM and the (lower) price they charged customers, no?

Lesson

Antitrust claims promise treble damages, but they involve a lot of risk, both factual and legal. Felder's claim foundered on a legal question -- do the rebates count? -- but many other things could have gone wrong (e.g., definition of the relevant product market).

Some kinds of antitrust claims present a better risk/reward ratio. These include allegations of price-fixing and other conduct that the Supreme Court has deemed per se unlawful under the Sherman Act. Current examples of such cases include ones relating to foreign exchange, the London Inter-bank Offer Rate (LIBOR), e-books, and -- yes -- after-market auto parts.

Both Felder's and In re Automotive Parts Antitrust Litigation, 12-md-02311 (E.D. Mich.), concern auto parts, but the latter involves claims of price-fixing rather than a (non-per se) monopolization theory. And the $100+ million in class settlements so far attests to the fact that per se beats "rule of reason" almost every time.

LIBOR Price-Fixing Claims Get Reprieve; Second Circuit Must Hear Appeal, Supreme Court Decides

Unanimous Court orders review of key district court ruling 

The Second Circuit made a mistake when it refused to hear an appeal, the Supreme Court held 9-0 today in Gelboim v. Bank of Am. Corp., No. 13-1174 (U.S. Jan. 21, 2015); see Supreme Court Takes LIBOR Case, Blawgletter®, July 1, 2014.

The Court's ruling will hasten -- by a year or more -- review of a key decision by the district court that has the job of handling price-fixing and other claims in the massive In re Libor-Based Financial Instruments Antitrust Litigation, No. 1:11-md-02262-NRB (S.D.N.Y.).

Gelboim also will likely affect how district judges and parties deal with discrete legal issues that could dispose of some but not all claims in complex, multi-district cases like Libor.

Gelboim and Libor

The underlying case -- in which Blawgletter's firm serves as co-lead counsel for a plaintiff class -- arose from efforts by banks during 2007-10 to suppress the London Inter-bank Offer Rate, or LIBOR. Because trillions of (nominal) dollars in loans, swaps, and other financial instruments use LIBOR as a benchmark (according to one source, "Libor underpins approximately $350 trillion in derivatives"), the banks' machinations caused them to appear more financially sound and thus enabled them to pay less in interest to commercial paper and other lenders, counterparties to interest-rate swaps, and others.

The plaintiffs in Gelboim alleged one claim -- that "a number of banks, acting in concert, had violated federal antitrust law" by fixing LIBOR, in violation of Sherman Act section 1. Gelboim, slip op. at 1. The Judicial Panel on Multidistrict Litigation assigned Gelboim and dozens of other cases from around the country to a single judge, in the Southern District of New York, "for pretrial proceedings" under 28 U.S.C. § 1407. Id.

Dismissal and appeal -- and dismissal of appeal

Acting on the banks' motions to dismiss, the district court threw out the antitrust claims of all Libor plaintiffs, including those in Gelboim. The court held that the plaintiffs could not prove "antitrust injury" from the banks' conspiracy to suppress LIBOR.

The Gelboim plaintiffs filed a notice of appeal in the Second Circuit, which oversees district courts in New York, Connecticut, and Vermont. That court dismissed the appeal on its own motion. It explained that the "orde[r] appealed from did not dispose of all claims in the consolidated action." Gelboim, slip op. at 6.

High Court review -- and reversal

The Gelboim plaintiffs filed a petition for review by the Supreme Court, which promptly granted it. The Court heard argument on December 9, 2014. Its unanimous ruling followed fewer than 60 days later.

The Court, per Justice Ginsburg, disposed of the issue before it in 10 pages. The putting of multi-district cases before one district judge for pretrial purposes does not, the Court ruled, effect a melding of them such that all dispositive orders must await a complete wrap-up of the MDL proceeding.

"Cases consolidated for MDL pretrial proceedings ordinarily retain their separate identities, so an order disposing of one of the discrete cases in its entirety should qualify under [28 U.S.C.] §1291 as an appealable final decision." Gelboim, slip op at 6-7.

Impact

The Court's ruling effectively permits all parties in Libor to obtain Second Circuit review of the district court's dismissal order. It also strengthens the hand of all Libor plaintiffs in any settlement talks with defendant banks, not least because the again-in-play antitrust claims allow joint and several liability regardless of contractual privity and permit recovery of treble damages and attorneys' fees. The state-law claims that remained after the dismissal of the price-fixing claims conferred neither advantage, the district court believed.

Gelboim may or may not speed up the handling of other MDL cases. MDL judges and parties now know that a dispositive ruling having "the hallmarks of a final decision" for even a single case among dozens, hundreds, or thousands can prompt appellate review as the other cases in the MDL lumber on.

Will that knowledge result in behavior that aims to postpone a "final decision" for strategic or tactical reasons? We will have to wait and see.

Illinois Brick Goes Global

Dear Blawgletterati:

A rebuke

Drop dead, the Seventh Circuit on November 26 told U.S. firms that want to collect treble damages under the Sherman Act for fixing prices on their foreign subs' purchases overseas.

Either have your subs buy the stuff in the U.S., the panel ruled, or purchase the goods for import into the U.S. yourself.

And quit your belly-achin', you could almost hear Circuit Judge (and antitrust maven) Richard Posner say.

Backdrop

The case that produced the Posner poke involved sales of liquid-crystal display panels by members of a price-fixing cartel. The price-fixers sold more than $5 billion worth of the panels to the Motorola phone-making enterprise, but only one percent of that amount went straight to the U.S. parent company; Motorola's non-U.S. subs bought the rest.

Motorola the parent joined with its overseas offspring in suing AU Optronics, Samsung, Sanyo, and other foreign members of the cartel. They noted, among other bits of proof, that a U.S. jury had already found AU Optronics guilty of fixing prices on LCD panels.

But, unlike the U.S. Department of Justice's Antitrust Division, Motorola and its subs had to prove not only that the bad conduct has a "direct, substantial, and reasonably foreseeable effect" on U.S. "trade or commerce", 15 U.S.C. 6a(1), but also that the "effect" on U.S. trade or commerce "gives rise to" the Sherman Act claim, id. 6a(2).These twin requirements of the Foreign Trade Antitrust Improvements Act (which Congress passed and President Ronald Reagan signed in 1982) doomed the claims by the non-U.S. Motorola entities to dismissal by the district court.

Affirmance

Without briefing or oral argument, the Seventh Circuit upheld the judgment. When Motorola protested, the same panel allowed both. But none of it mattered.

In Motorola Mobility LLC v. AU Optronics Corp., No. 14-8003 (7th Cir. Nov. 26, 2014), the court affirmed on the basis of the "gives rise to" prong of the FTAIA test. Judge Posner put a spotlight on the problem:

What trips up Motorola’s suit is the statutory requirement that the effect of anticompetitive conduct on domestic U.S. commerce give rise to an antitrust cause of action. 15 U.S.C. § 6a(2). The conduct increased the cost to Motorola of the cellphones that it bought from its foreign subsidiaries, but the cartel-engendered price increase in the components and in the price of cellphones that incorporated them occurred entirely in foreign commerce.

Motorola, slip op. at 6. The "price increase . . . occurred entirely in foreign commerce" because Motorola's foreign subs bought and took delivery of the LCD panels outside the U.S. That the cartel members knew the subs would send the panels to Motorola for resale in the U.S. might have met the "direct, substantial, and reasonably foreseeable effect" prong of the FTAIA, but it couldn't satisfy the one requiring the domestic effect to "give[] rise to" the antitrust claim, the panel held.

Forum Shopping and Illinois Brick

Judge Posner gave two main reasons for the ruling. He explained that Motorola chose to run its business overseas through non-U.S. subsidiaries and must therefore live with the consequences of that choice. "For example," he noted, "although for antitrust purposes Motorola contends that it and its subsidiaries are one . . . , for tax purposes its subsidiaries are distinct entities paying foreign rather than U.S. taxes." Motorola, slip op. at 7. "No doubt Motorola thinks U.S. antitrust remedies more fearsome than those available to its foreign subsidiaries under foreign laws", he added. "But that’s just to say that Motorola is asserting a right to forum shop." Id. at 8. 

Nor did Motorola's position square with a bedrock doctrine of U.S. antitrust law -- the "indirect purchaser" rule of Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977). Illinois Brick "forbids a customer of the purchaser who paid a cartel price to sue the cartelist, even if his seller—the direct purchaser from the cartelist—passed on to him some or even all of the cartel’s elevated price." Motorola, slip op. at 9. The FTAIA's "gives rise to" requirement, Judge Posner urged, in effect enforces Illinois Brick's bar to damages suits by indirect purchasers. 

Bright-line rule?

Still, the Motorola opinion does leave a sliver of daylight for U.S. firms that buy components in foreign climes. The beam comes in the guise of the "pass-on defense" to Illinois Brick. As Judge Posner pointed out, the Court in Illinois Brick mentioned that a “situation in which market forces have been superseded and the pass‐on defense might be permitted is where the direct purchaser is owned or controlled by its customer.” Illinois Brick, 431 U.S. at 736 n.16. And a "customer" that "own[s] or control[s]" the "direct purchaser" sounds a lot like a parent company such as Motorola.

Judge Posner argued that the Illinois Brick exception may not matter, at least if you look at things from the subs' point of view:

Although Motorola, the “customer,” owns its foreign subsidiaries—the “direct purchasers” of the components—they are incorporated under and regulated by foreign law. What remedies they may have, if they overpay for inputs that they buy abroad, are determined not by U.S. anti‐trust law but by the law of the countries in which the subsidiaries are incorporated and are therefore citizens of, or the countries in which the price fixers they bought from operate, or the countries in which the purchases were made. And that is quite apart from Illinois Brick or other sources of U.S. anti‐trust law.

Motorola, slip op. at 12-13.

No cigar

But that rationale doesn't quite hold up. What if the relevant sale came not when the foreign subs bought the panels overseas but when Motorola purchased the phones that featured the panels in the U.S. from those subs? Wouldn't that avoid the moral peril of letting foreign firms reap the tax and other benefits of their non-U.S. status while also permitting them to morph into U.S. entities for purposes of suing under the Sherman Act?

Yes, it would. But Motorola had long before chosen not to base its claim in the passing-on theory. As Judge Posner put it:

In any event Motorola waived in the district court any argument that it could base damages on the effect of the cartel’s pricing of components on the cost to Motorola of cell-phones incorporating those components. It argued only that its foreign subsidiaries overpaid for the LCD panels. How the overcharge may have affected Motorola’s cellphone business because of the component price fixing was a path that Motorola stepped off of after the pleadings.

Motorola, slip op. at 13-14.

A U.S. enterprise whose non-U.S. subs buy goods overseas thus may have a claim despite the FTAIA, but the enterprise must base its damages model on the passing-on of price-fixing overcharges by the subs to the parent.

What to do?

If your company finds itself on the losing end of an international cartel, you should think about asking for a consultation with an antitrust expert. In many instances, the potential recovery would easily justify the expense of having the expert take a close look at the potential claim. 

Yours truly,
Blawgletter

Use of Phony Benchmark Rate Supports Bad Faith Claim, Second Circuit Holds

Good faith and fair dealing

New York law "implies" a duty in all contracts -- a duty to perform promises in good faith.^* 

Does that mean a party must adjust a contractual benchmark rate if it knows something has distorted the benchmark?

Yes, the Second Circuit held in Security Plans, Inc. v. CUNA Mut. Ins. Society, No. 13-384-cv (2d Cir. Oct. 17, 2014).

The ruling may prove important in pending cases that involve trillions of dollars in benchmark transactions.

Credit insurance

The case before the court arose from the sale of a credit insurance business. The asset purchase agreement required CUNA Mutual, the buyer, to pay an "earnout" that tracked future profits from the business.

The problem arose from the "loss ratio" that CUNA Mutual used to deduct "losses" from premium payments to compute the profits. As it realized before the earnout period ended, the loss ratio it applied to all its lines of business -- including the credit insurance segment -- overstated actual losses.

Lawsuit

The unduly high loss ratio produced a zero earnout. That upset the seller, Security Plans.

It sued, alleging, in relevant part, that CUNA Mutual breached the covenant of good faith and fair dealing -- both by setting the loss ratio too high and by failing to adjust it at the end of the earnout period.

The district court granted CUNA Mutual summary judgment in relevant part.^** Security Plans appealed.

Second Circuit ruling

The Second Circuit affirmed in part and reversed in part. It laid out the pertinent law as follows:

Under New York law, all contracts that confer discretion include an implied promise that neither party will "act arbitrarily or irrationally" in exercising that discretion.

*  *  *  *

The implied covenant [of good faith] does not "undermine a party's 'general right to act on its own interest in a way that may incidentally lessen'" the other party's expected benefit. . . . The covenant will be breached only in a narrow range of cases. A plaintiff must show substantially more than evidence that the defendant's actions were negligent or inept. . . . The plaintiff must instead demonstrate something more, such as that the defendant "act[ed] arbitrarily or irrationally in exercising [the] discretion" afforded to it under the contract.

Security Plans, slip op. at 3 & 24-25 (citations omitted).

CUNA Mutual's error in setting the loss ratio, the panel held, did not support a bad faith claim "inasmuch as the record contains nothing to suggest anything more than negligence" on its part. Id. at 26.

But CUNA Mutual's "refus[al] to provide a revised earnout calculation in light of an alleged system-wide error concerning claim reserves" presented a different matter, the court believed. Id. The panel said:

[T]he contract places on the defendant the responsibility for calculating the earnout, thereby conferring a limited discretion in selecting the values -- such as loss ratios and written premium -- that enter into the calculation in the first place. . . . This latter form of discretion is indeed the subject of plaintiff's claim in this case, and the plaintiff may therefore argue that the defendant acted arbitrarily or irrationally in handling the earnout calculation.

Id. at 26-27 (citations and footnote omitted). The panel concluded:

Making all inferences in the plaintiffʹs favor, a rational trier of fact could properly conclude that it was arbitrary for the defendant to refuse to revise the earnout calculation in order to correct for the suspect numbers. On this record, a trier of fact could, but would not necessarily be required to, conclude that: (i) the initial decision that set high claim reserves for the earnout period was made by mistake, and not as a result of actuarial judgment; (ii) this mistake caused Security Plansʹ performance data to be distorted in ways that negatively affected the earnout; (iii) this mistake30 was noticed in time to revise the earnout calculation accordingly, and such revision was possible; (iv) the mistake was acknowledged by all parties concerned; and (v) CUNA Mutual, for no valid business reason, decided not to adjust the earnout calculation. In making this second decision not to revise the calculation, CUNA Mutual was exercising its contractually conferred authority as the party charged with calculating the earnout, but a trier of fact could find it exercised this discretion arbitrarily.

Id. at 29-30.

Implications

The Southern District of New York has before it several cases that involve claims of deliberate manipulation involving benchmark rates. These include In re Foreign Exchange Benchmark Rates Antitrust Litigation, No. 13-07789 (S.D.N.Y.), In re North Sea Brent Crude Oil Futures Litigation, No. 13-md-02475 (S.D.N.Y.), and In re LIBOR-Based Financial Instruments Antitrust Litigation, No. 11-md-2262 (S.D.N.Y.).^***

The benchmarks at issue affect trillions of dollars in transactions.

In at least two of the three, the plaintiffs assert state law claims (as well as federal ones). The Second Circuit's ruling in Security Plans should give those claims a legal boost, pointing the way to showing conduct that violates the covenant of good faith and fair dealing in the setting or adjustment of the relevant benchmarks.

 _________________

^* Moran v. Erk, 901 N.E.2d 187, 190 (N.Y. 2008) (stating that "neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract").

** We've ignored other parts of the case to focus on the benchmark aspect.

^*** Blawgletter's firm serves as lead counsel for one of the plaintiff classes in the LIBOR litigation.

Dow Loses $1.2 Billion Price-Fixing Appeal; Large Victory for Class Actions

Big damages . . . and a big win for class actions

A Tenth Circuit panel of judges has upheld a $1.2 billion verdict and judgment against Dow Chemical for its role in a price-fixing conspiracy that involved urethane chemical products. Dow Chemical Co. v. Seegott Holdings, Inc., No. 13-3215 (10th Cir. Sept. 29, 2014) ( opinion here).

More than any other court of appeals decision in recent memory, the ruling should help blunt aggressive attacks on class actions in which the plaintiff class seeks an award of damages.

Class treatment prevails

The panel rejected Dow's four main arguments on appeal:

• that the district court shouldn't have certified the case as a class action,
• that statistical evidence of damages lacked a reliable basis,
• that plaintiffs failed to prove the price-fixing conspiracy succeeded, and
• that the damages award violated Dow's seventh amendment right to trial by jury.

The court distinguished Comcast Corp. v. Behrend, 133 S. Ct. 1346 (2013) and Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), holding that neither decision required the conclusion that individual issues predominated in the case against Dow Chemical and that the district court acted within its discretion in ruling otherwise.

The panel's treatment of the attacks on damages also stressed the broad discretion that district courts have in admitting expert testimony about statistics and other matters involving expert knowledge.

Kansas City trial

The jury trial took place before U.S. District Judge John Lungstrum in Kansas City, Kansas. It ended in early 2013. Blawgletter's friend and colleague Joe Goldberg served as lead trial counsel for the class.

Congratulations, Joe!

Guest Post: "The Everything Store" -- Can You Buy a Monopsony on Amazon?

You have a special treat today.

Hollis Salzman and Meegan F. Hollywood at Robins, Kaplan, Miller & Ciresi L.L.P. in New York have written a timely Guest Post on an important and exotic antitrust topic -- monopsony.

Ms. Salzman serves as Co-Chair of Robins Kaplan's Antitrust and Trade Regulation Group and as co-lead counsel in blockbuster antitrust class actions, including In re Automotive Parts and In re Air Cargo Shipping Services. Recognition of her knowledge and skill have come from Chambers USA, Lawdragon, and Benchmark Litigation, to name a few. Check out a recent interview by Law360.

Ms. Hollywood prosecutes class actions that involve price-fixing, unlawful monopolization, and other anticompetitive practices. She heads up the associates who handle In re Air Cargo Shipping Services.

You can contact them at [email protected] and [email protected], respectively.

*  *  *  *

"The Everything Store" -- Can You Buy a Monsopsony on Amazon?

There has been a lot of buzz in recent months over the highly publicized Amazon-Hachette dispute, which was first reported by The New York Times when negotiations over renewed contract terms between the online retailer and publisher broke down earlier this year.  While details regarding the exact nature of the dispute have not been divulged, the general consensus is that Hachette prefers to return to an agency pricing model, which allows publishers to set the prices of their own books.  Amazon is adamantly opposed to this switch because the agency model would prevent the kind of drastic discounting that Amazon is known for.  It’s no secret that publishers deem Amazon’s discounting practices a violation of antitrust laws.  Recent debate, however, has focused on whether US regulators tend to agree.

Of course, all of this follows from that other much-publicized dispute in which the Department of Justice successfully claimed that the six largest publishers in the US, including Hachette, unlawfully colluded with Apple to raise e-book prices when they introduced the agency pricing model in response to Amazon’s deep discounting back in 2010.  The publishers settled the case and agreed to certain restrictions, which largely enabled Amazon to continue discounting e-books.  Moreover, US District Judge Denise Cote’s final order, issued in 2013, laid out a staggered schedule for the various publishers to renegotiate their contracts with retailers.  As it turns out, Hachette was up first.

Reportedly, Amazon demanded better terms from Hachette, and negotiations rapidly deteriorated.  Amazon retaliated by declaring literary war on Hachette in an effort to force the publisher’s hand.  Specifically, Amazon delayed delivery of books published by Hachette for up to three weeks, removed the pre-order option for Hachette titles, charged more for Hachette books, and even suggested that readers might enjoy a book from another author instead.  To add to the hype, Hachette authors simultaneously took to social media to denounce the mammoth online retailer for offenses ranging from bullying to extortion to a violation of antitrust laws.

Meanwhile, across the pond, recent reports indicate that the European Commission has begun a preliminary investigation into complaints that Amazon violated European competition law by engaging in similar tactics with Bonnier AB, a German publishing trade group.  Specifically, Bonnier claims that Amazon delayed delivery of its books in order to force the publisher to accept lower prices for its e-books.  European antitrust law expressly forbids companies with a dominant market position from engaging in such abusive conduct. 

All of this has led many to ponder whether Amazon’s recent exploits might (finally) raise the eyebrows of US antitrust watchdogs.

Monopoly, Monopsony – What’s The Difference? 

While commentators often attach the word “monopoly” to Amazon, the real inquiry is whether Amazon is, instead, a “monopsony.”  An unlawful monopsony, the lesser known violation in the antitrust family, occurs when a buyer of goods has the power to unlawfully lower the prices of the products that it buys.  By contrast, an unlawful monopoly occurs when a seller of goods has the power to unlawfully raise the prices of what it sells.  Both result in a misallocation of resources, which harms consumers and distorts markets, and therefore each violates antitrust law. 

The theory of monopsony assumes that the monopsonist has the power to dictate terms to its suppliers.  However, to show monopsony, one must show that suppliers are forced to sell their products at prices so low that the loss results in a reduction of supply.  Harm to the market results when suppliers are, in turn, driven out of business, or have less money to invest in new innovation, technology, equipment, and/or expansion.  In that sense, a monopsony often does not directly affect consumers in the traditional way that unlawful monopolies do. 

As an added wrinkle, buyer power without true monopsony power can actually benefit consumers.  Indeed, when buyer power pushes prices down without resulting supply reduction, consumers enjoy lower downstream prices.  Consumers are harmed, however, when output reduction is coupled with a misallocation of resources.  While consumers may not immediately feel the effects of the monopsony, harm resonates nonetheless as wealth is transferred to the monopsonist, and consumers are faced with higher prices and fewer options.

For its part, Amazon has a strong reputation for consumer-friendly discounting.  Thus, as consumers enjoy discounted e-book prices, it is difficult to imagine how they are being harmed by Amazon’s practices.  The relevant question is whether Amazon’s bullying tactics with publishers could effectively result in a reduction of books being published.       

Could Amazon Be The First Illegal Monopsony?

Significantly, no US court has yet to find a single company guilty of an unlawful monopsony.  The case that came the closest was Weyerhaeuser Co. v. Ross-Simmons Hardware Lumber Co., 549 U.S. 312 (2007).  In Weyerhaeuser, a dominant purchaser of logs was accused of overbidding, and driving its smaller rival out of business.  While the trial court and Ninth Circuit found for the plaintiffs, agreeing that the defendant paid “more than it needed to pay” for logs, the Supreme Court reversed 9-0.  

The Weyerhaeuser Court concluded that predatory buying must be evaluated under a much stricter analysis than that contemplated by the Ninth Circuit.  Specifically, the Court held that a buyer is liable only if (1) buy-side bidding caused costs to rise higher than revenues, and (2) the defendant has a “dangerous probability of recouping the losses” through an “exercise of monopsony power.”  It is important to note that under the Weyerhaeuser standard, recoupment via higher prices in the downstream market does not satisfy the test.  Rather, the Supreme Court required recoupment “through the exercise of monopsony power,” that is – by forcing lower prices on the buy-side.  

Since Amazon first introduced its Kindle product, it has priced e-books below what it was buying them for.  For example, if Amazon bought an e-book from Hachette for $15, it resold it to a consumer for $9.99, losing $5.01 per e-book.  Not surprisingly, e-book consumers flocked to Amazon helping the online retailer to grow exponentially over the years, and causing publishers and authors to rely on Amazon’s sales.  In fact, some have even suggested that consumers use Amazon as a modern-day card catalog.  According to that theory, if a book or author is not sold on Amazon, that book or author must not exist. 

With its low prices and established reputation as a consumer-friendly reading room of sorts, there is little debate that Amazon is a dominating force in the e-book market, both on the buy-side and sell-side.  Varied reports have placed Amazon’s share of the e-books market from anywhere between 60 to 90 percent.  Moreover, Amazon accounts for nearly 65 percent of Hachette’s e-book sales.  Thus, Amazon certainly has market power in the antitrust sense, and its buyer power alone cannot be said to be merely circumstantial. 

Now it seems that Amazon is attempting to enhance its bottom line by wielding its power in the market to achieve more favorable pricing from publishers, rather than by increasing its own prices downstream, i.e. recoupment through the exercise of monopsony power.  It remains to be seen, however, whether Amazon’s tactics will result in a reduction of output.  Publishers will certainly be put out by larger discounts to Amazon and expensive services.  Authors will likewise suffer if publishers are, in turn, unable to pay large advances, or are paid less per book due to higher discounts paid to Amazon.  Stifling authors could certainly lead to fewer publications for consumers to choose from, and a reallocation of wealth flowing directly to Amazon. 

Interestingly, in an effort to break its standoff with Hachette, Amazon executive David Naggar, wrote an open letter to Hachette authors proposing to take them out of the middle of the dispute by promising them a “big windfall.”  Specifically, Amazon dangled 100% of the sales price of every Hachette e-book sold on Amazon to Hachette authors.  However, Hachette quickly rejected the proposal, calling it “suicidal.”  Whether Amazon is trying to avoid being labeled an unlawful monopsonist by this recent proposal, or whether it is just trying to win back the hearts of frustrated authors and consumers alike remains to be seen.

Conclusion

The general consensus among antitrust analysts is that US regulators are not likely to intervene in what has been labeled by some as a simple business dispute.  Indeed, many view this dispute as normal business dealings between a retailer and supplier, and maintain that the enormous attention merely stems from the visibility and notoriety of the parties involved.  However, as Amazon continues its fight with Hachette, and its contracts with the remaining publishers start to expire, perhaps US regulators will be inclined to take a closer look.

Fight Breaks Out over Midcourse MDL Review

A Question of Efficiency

Will quick review of a final judgment in just one of many cases that make up a large multi-district litigation bog the MDL process down  -- or make it work better?

Defense lawyers insist that consolidation of cases before a single district judge (by the U.S. Judicial Panel on Multidistrict Litigation) changes the general rule that a final judgment against a party gives it (the party) the right to take an immediate appeal. The Supreme Court will decide the issue in the coming Term. See Supreme Court Takes LIBOR Case.

While the outcome in the Supreme Court may not turn formally on the efficiency question, the issue has practical importance for clients and lawyers who participate in the MDL process.

Who Gains from Interlocutory Review

Defendants will normally not want appeals from final judgments in individual cases for the simple reason that, by definition, they will have won in the district court handling the MDL. An appeal puts that victory at risk.

If the defendants can hang on to the win, they can use it to drive down the settlement value of the entire MDL. They potentially could save tens of millions if not billions of dollars.

Plaintiffs, on the other hand, want the opposite. Prompt review by a court of appeals will give them a chance to overturn an adverse ruling. It will also reduce pressure to accept a low-ball settlement.

What the System Wants

Allowing interlocutory appeals from final judgments makes more sense from the perspective of the federal judicial system. The system wants just and right outcomes. Its ability to get them depends on correct determinations of legal issues. Review of a ruling by a single district judge on a key matter of law by a panel of appellate judges enhances the likelihood that the MDL process will yield a fair result.

Blawgletter said as much recently to a reporter from Policy and Regulatory Report, Ryan Lynch. Defendants "are having trouble", we said, with the prospect of an immediate appeal "because they  now have risk that they would prefer not to have. It's not that there is any inefficinecy  happening. It is that there is the potential that they are going to suffer a loss on something that they have [so far] won."