Harrison Frahn, William Pilon, Steven McLellan
Simpson Thacher & Bartlett LLP
On September 12, 2017, the United States District Court for the Central District of California dismissed an antitrust complaint against Biogen Inc. (“Biogen”) on the grounds that the Plaintiff, Ixchel Pharma, LLC (“Ixchel”), lacked antitrust standing because it had not suffered an injury to competition. Ixchel Pharma, LLC v. Biogen Inc., No. 2:17-00715 WBS EFB, 2017 WL 4012337 (E.D. Cal. Sept. 12, 2017). The District Court’s decision relied on and expanded a recent Third Circuit holding that a pharmaceutical company that out-licensed products, rather than producing or distributing the products themselves, was not injured by conduct that reduced competition in the downstream market for the licensed product.
The Ixchel decision is important, in that it highlights the importance of pleading antitrust injury in cases involving Actavis-type reverse payment settlements in the pharmaceutical market.
Ixchel, a biotechnology company, alleged that it was working to develop a drug to treat a neurological disorder, Friedreich’s ataxia, using the active ingredient dimethyl fumarate (“DMF”). Ixchel, 2017 WL 4012337, at *1. Ixchel did not have the resources to develop the drug on its own, and so it entered into a Collaboration Agreement with Forward Pharma FA ApS (“Forward”) to develop the drug. Id. Based on the agreement, Forward would investigate the feasibility of conducting clinical trials for the drug and, if feasible, conduct and pay for the trials. Id. After the trials, Forward had sole discretion whether or not to seek FDA approval. Id. If FDA approval were sought and obtained, Forward would manage and pay for manufacturing and commercialization of the drug with Ixchel’s assistance, and Ixchel would be entitled to royalties from drug sales. Id.
Biogen marketed the drug Tecfidera, which also used DMF as an active ingredient, to treat a different neurological disorder, multiple sclerosis. Id. Doctors also prescribed Tecfidera “off-label” to treat a variety of other neurological disorders, including Friedrich’s ataxia. Complaint ¶ 19. At the relevant time, Tecfidera was the only FDA-approved drug containing DMF for treating neurological disorders in the United States. Ixchel, 2017 WL 4012337, at *1.
In October 2016, Forward determined that it was feasible to conduct clinical trials for the Ixchel DMF drug. Id. Forward and Ixchel began preparing the drug for clinical trials. Id. However, at the same time, Biogen and Forward were involved in an intellectual property dispute over the ownership of intellectual property rights relating to the use of DMF as a therapeutic. Id. Biogen and Forward settled this dispute in January 2017. Id. As a condition of the settlement, Forward agreed to terminate its contract with Ixchel regarding developing a DMF drug for Friedreich’s ataxia in exchange for a $1.25 billion settlement payment from Biogen. Complaint ¶ 32. Subsequently, Forward terminated its agreement with Ixchel and ceased working with Ixchel on the clinical trials. Ixchel, 2017 WL 4012337, at *2. Ixchel was unable to find a new partner to develop its DMF drug. Id.
Ixchel sued Biogen, claiming that its payment to Forward in exchange for terminating the agreement with Ixchel stifled competition in the market for DMF drugs. Id.
The Antitrust Injury Requirement
The requirement to establish antitrust injury was established by the Supreme Court’s decision in Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489 (1977). The plaintiffs in Brunswick alleged that Brunswick, the largest manufacturer of bowling equipment, was harming competition by acquiring and operating a number of failing bowling alleys that otherwise would have gone out of business. Id. at 480. The plaintiffs, operators of competing bowling alleys, claimed that they were entitled to damages for the increased profits they would have captured if the bowling alleys acquired by Brunswick had gone out of business. Id. at 481. The plaintiffs won at trial and on appeal to the Third Circuit. Id. at 481-82. However, the Supreme Court unanimously reversed, holding that the plaintiffs must prove “antitrust injury, which is to say injury of the type the antitrust laws were intended to prevent and that flows from that which makes defendants’ acts unlawful. The injury should reflect the anticompetitive effect either of the violation or of anticompetitive acts made possible by the violation.” Id. at 489. The Brunswick Court was concerned with plaintiffs who sought to use the antitrust laws to reduce competition. As the Brunswick Court noted, compensating plaintiffs because competition remained robust would be “inimical to the purposes of [the antitrust] laws.” Id. at 488.
Lower courts have interpreted Brunswick’s antitrust injury requirement to limit standing to consumers and competitors, with a narrow exception for third parties whose injuries are “inextricably intertwined” with the injury to competition. Recently, in Ethypharm S.A. France v. Abbott Laboratories, 707 F.3d 223 (3d Cir. 2013), the Third Circuit addressed the application of the antitrust injury requirement to a foreign pharmaceutical company, Ethypharm. The company agreed to supply Antara, a drug used to lower cholesterol, to a third party, Reliant, for distribution in the United States market. Id. at 226. Their agreement provided that Reliant was responsible for obtaining all regulatory approvals for Antara. Id. Reliant obtained regulatory approval for Antara, but then became involved in a patent dispute over the drug with Abbott Laboratories, which distributed a similar drug. Id. at 227-28. To settle the suit, Reliant agreed to pay royalties to Abbott and agreed to certain restrictions on any assignment of the Antara program. Id. at 228. The restrictions precluded Reliant from selling or assigning its rights to Antara to a number of large pharmaceutical companies, and provided for an increase in the royalties due to Abbott if the Antara program were sold or assigned to any other party. Id. at 228-29.
A few months later, Reliant sold its interests in Antara to a small pharmaceutical company that did not successfully market Antara and subsequently declared bankruptcy. Id. at 229-30. Ethypharm sued Abbott, alleging that the settlement between Abbott and Reliant forced the sale of Antara to an ineffective competitor, which caused the marketing of Antara to fail. Id. at 230. The District Court granted summary judgment for Abbott, holding that Ethypharm had not presented sufficient evidence that Abbott’s allegedly anticompetitive conduct had caused Ethypharm’s injuries. Id. at 231. The Third Circuit affirmed, holding that Ethypharm had failed to establish antitrust injury. The Third Circuit explained that, under Brunswick as interpreted by its own precedent, antitrust injury is “limited to consumers and competitors in the restrained market and to those whose injuries are the means by which the defendants seek to achieve their anticompetitive ends.” Id. at 233. The court reasoned that Ethypharm was not a competitor of Abbott because Reliant, not Ethypharm, was the agreed distributor of Antara in the United States. Id. at 236. Ethypharm, pursuant to its contract with Reliant, did not seek or hold FDA regulatory approval, and thus could not compete in the United States market. Id. The court stressed that its conclusion was not based on “the general arrangement of manufacturer and distributor [being] problematic,” rather “it is the fact that Ethypharm cannot sell Antara in the United States because of legal barriers particular to the pharmaceutical market, barriers that Ethypharm chose not to surmount.” Id. The Third Circuit also rejected Ethypharm’s argument that its alleged injuries were the means by which Abbott sought to achieve its anticompetitive ends for the same reason: because Ethypharm chose not to participate in the United States market. Id.
The Ixchel Court’s Analysis
The District Court in Ixchel began its analysis by noting that under Ninth Circuit precedent, the antitrust plaintiff, Ixchel, must be a participant in the same market as the defendant, Biogen, to satisfy the antitrust injury requirement. Ixchel, 2017 WL 4012337, at *3. From there, the District Court concluded that Ixchel had not suffered an antitrust injury with relatively minimal discussion. The court noted that Ixchel admitted that it was not a current competitor because “Biogen is currently the only company in the world selling any drug in that market.” Id. Relying heavily on the Third Circuit’s decision in Ethypharm, the District Court concluded that Ixchel was not a potential competitor because, as in Ethypharm, “plaintiff and defendant were not competitors in a particular drug market where the plaintiff gave a drug’s manufacturing and development rights to a third party and the third party bore the risk and expense of seeking FDA approval.” Id. In short, the District Court held that, as a matter of law, Ixchel is not a potential competitor in the U.S. drug market because it passed “on to Forward the expense and risk of competing in the U.S. DMF drug market.”
Ixchel also argued, as did the plaintiff in Ethypharm, that it suffered an antitrust injury because “the injury [plaintiff] suffered was inextricably intertwined with the injury the conspirators sought to inflict” and the harm “was a necessary step in effecting the ends of the alleged illegal conspiracy.” Id. Again, the District Court relied on Ethypharm, rejecting Ixchel’s argument because Ixchel “had willfully chosen not to enter the U.S. market for a specific drug and this exception is largely limited to instances where plaintiff and defendant are in the business of selling goods in the same relevant market.” Id. Interestingly, the District Court noted that the “inextricably intertwined” doctrine applies when denying standing would “leave a significant antitrust violation undetected or unremedied,” but did not engage in any analysis of who, if not Ixchel, could bring the claims in this case. Id.
A key difference between Ixchel and Ethypharm that went unremarked by the district court was that the allegedly anticompetitive settlement in Ixchel was similar to a “reverse payment” settlement, where a patent holder pays an alleged infringer to take or keep an infringing product off the market. The Supreme Court recently held in FTC v. Actavis, 133 S. Ct. 2223 (2013) that reverse payment settlements can constitute anticompetitive conduct under certain circumstances. Although not entirely on all fours with the more common brand/generic reverse payment settlements addressed in Actavis, the settlement in Ixchel did bear certain important similarities. Chief among these is the $1.25 billion payment from Biogen, the purported holder of the patent rights, to Forward to purchase Forward’s agreement and cause Forward to back out of its deal with Ixchel and thereby prevent, or at least seriously delay, the launch of a potentially competitive DMF product. In contrast, the settlement in Ethypharm involved a more traditional settlement payment where the alleged infringer agreed to pay royalties to the patent holder on account of continued sales of the product.
Given the Actavis decision, there seems to be some tension between the District Court’s decision in Ixchel and the rationale animating the result in Brunswick. Brunswick imposed an antitrust injury requirement to prevent competitors from using the antitrust laws to reducecompetition. In contrast, Ixchel alleges that the agreement between Biogen and Forward prevented an increase in the number of competitors that otherwise would have resulted. Taking Ixchel’s allegations at face value, they sought to remedy an agreement between two competitors to reduce the number of competing drugs in the market. An agreement between competitors to eliminate one competing product seems to be the exact type of harm that the antitrust laws are intended to prevent. On the other hand, a motivating concern behind Actavis was the bottleneck created under the Hatch-Waxman Act when the ‘first-filer’ generic settles with the branded company and thereby keeps all other generics from being approved. This market effect did not appear to be at issue in Ixchel (or Ethypharm).
The Ixchel decision reflects that courts may interpret the antitrust injury requirement narrowly, often limiting claims to direct participants in the market. Before bringing antitrust claims, plaintiffs will want to carefully evaluate their role in the market to understand whether they can fairly cast themselves as customers or competitors of the defendants for antitrust injury purposes, and to recognize that a licensing arrangement may affect available options and remedies.
Elizabeth C. Pritzker
Pritzker Levine LLP
On August 14, 2017, the Superior Court of California, County of San Francisco granted a motion to certify a class of California self-funded health plans and state agencies in an unpublished opinion in UFCW & Employers Benefit Trust v. Sutter Health, Case No. CGC-14-538451.
UFCW, a healthcare benefits trust, alleges that Sutter Health and its affiliated corporate entities violated California’s Cartwright Act and Unfair Competition Law by illegally inflating hospital pricing and compelling provider networks to enter into anticompetitive healthcare provider agreements. The court granted plaintiffs’ motion for class certification while acknowledging that the “landscape of th[e] case, with its many services, prices, and discounts” presented a “complex economic picture.” Order at 9.
According to plaintiff’s complaint, millions of people in Northern California enroll in group health plans providing access to healthcare services from a select group of healthcare providers (including hospitals) at established rates. The benefits are paid either by the employer or a healthcare benefits trust, such as UFCW. So-called “network vendors” negotiate healthcare providers for the prices of the services and products they sell, and assemble the provers into large provider networks. Plaintiff and similar entities then contract with network vendors to obtain access to their provider networks and, consequently, their negotiated prices for healthcare services. See Order at 1-2.
Sutter is the largest healthcare provider in Northern California. According to plaintiff’s complaint, the five major network vendors in California re Blue Shield of California, Anthem Blue Cross, Aetna, Cigna and United Healthcare. UFCW alleges that Sutter uses its dominant economic power to compel these network vendors to agree to anticompetitive terms in their provider agreements. These agreements contain (1) non-par contracted provisions (or “all or none” provisions), (2) anti-tiering provisions through which Sutter refuses to participate in narrow networks, and (3) provisions that block price transparency. Order at 2. According to UFCW, these agreements constrain the types of provider networks that the network vendors can offer to their customers, and consequently harm UFCW and similarly situated self-funded payors, who must pay substantially inflated prices for their enrollees’ healthcare. Id. UCFW filed a class action alleging these actions by Sutter and its affiliated restrain competition and result in inflated prices for health care services and products, in violation of the Cartwright Act, California’s state antitrust statute.
UFCW moved to certify a class of self-funded health plans that are “citizens of California” or “arms of the State of California” that compensated Sutter for acute care hospital services or ancillary products, from 2003 to the present, at prices set by contracts between Sutter and Aetna, Anthem, Blue Shield, Cigna, and United Healthcare (also known as PacificCare). Order at 2. Before tackling the class certification question under CCP section 382 (California’s equivalent of FRCP 23), the court addressed and rejected Sutter’s efforts to discredit UFCW’s definition of the relevant market. Sutter had attempted to argue that the relevant market is one in which consumers might readily complete for services offered by competing non-Sutter hospitals. See id at 6. The court explained that this characterization ill-described the market plaintiff alleges in this case. Here, ‘[p]atients are not class members,” the Court said. Id. “The market is available to Network Vendors who are ‘in the market’ as it were for networks or collections of services available at hospitals across California. Class members sign up for the choices Network Vendors have been offered (citation omitted).” Id at 7. Thus, “[u]nder plaintiff’s theory of the case, it doesn’t matter if an x-ray is cheaper at a non-Sutter hospital; if plaintiffs are right on the merits, the patient will still go to the (assertedly) more expensive Sutter hospital for the x-ray as a function of the restrains at the hospital level.” Id at 6-7 (italics and parenthetical in original). Within this market, the court held, UCFW “has evidence that Sutter is sufficiently pervasive in the areas over which plaintiffs must have access that it is not possible to have a plan that excludes Sutter. Id.
Turning to the section 382 factors for class certification, the court found the class of over 1500 California self-funded health plans was sufficiently numerous. The Court also found that class members could be ascertained based on available insurance records, even though some “individualized inquiry may be needed to identify some of the class members.” Order at 11. The Court found the class to be sufficiently ascertainable because the potential class members themselves would “be able to determine whether or not why belong in the class.” Order at 10.
Noting that “impact is often the key issue” in antitrust cases, the court went on to address predominance. Order at 15. Plaintiffs’ theory of liability is that “Sutter implemented its anticompetitive scheme through substantially identical contract provisions with Network Vendors that restricted their ability to offer narrow networks, tiered products, and transparency to the self-funded health plans.” Id at 11. The evidence presented by UFCW revealed that “Network Vendors (and, consequently, their self-funded payor members) were subject to the same or substantially similar restrictive contract provisions with Sutter, which consequently inhibited price competition in the marketplace.” Id at 14 (parenthetical in original). “The nature and circumstances of the various provider agreements at issue,” the court found, “raise common factual and legal issues for all self-funded payors who paid for healthcare services under these agreements.” On the issue of impact, the court found “evidence that Sutter’s prices were well above the average in Northern California,” and that “[a]most all class members were subject to those prices.” Id at 15.
The court also found UFCW to be a typical and adequate class plaintiff. “As with other self-funded health plans,” the court held, UCFW “purchased from Sutter at prices set by contract between Sutter and a Network Vendor. The prices were set by contract, with similar pricing across all Network Vendor contracts.” Id at 30. Additionally, the court found, “[a]ll of these prices were impacted by Sutter’s challenged practices, which applied uniformly to all Network Vendors. Id. Although Sutter complained that UFCW’s executive director “doesn’t know much about the suit,” the court did not find this factor disqualifying. Id at 31 (citing In re Processed Egg Prod. Antitrust Litig., 312 F.R.D. 171, 181 (E.D.Pa. 2015) (“as Plaintiffs unabashedly note, ‘A class representative need only possess ‘a minimal degree of knowledge necessary to meet the adequacy standard.’”)).
The court also found the element of superiority was satisfied. “Without the class action thousands of individual suits would be required,” the court held. Order at 32. “Compared to the mass of the possible individual actions, the class action device is superior.” Id.
Much of the court’s opinion (see Order at 15-29) addresses the parties’ competing expert analyses and opinions regarding these positions and whether impact could be proven on a class wide basis. The opinion details the differing economic analyses of the parties, including the expert’s assumptions regarding the relevant market, and the pricing computations and econometric modeling utilized by each side’s experts. “As a matter of econometric and other market analysis,” the court concluded, “it is plausible that either party’s view of the market mechanisms will turn out to be valid. If the jury does not believe that Sutter’s acts illegally constrained competition at the hospital level, or on summary judgment it appears there is no evidence of it, plaintiffs will lose this case.” Order at 20-21. “But in this class certification context,” the court held, “unless Sutter can demonstrate that Sutter’s theory of recovery is infeasible because, for example, it misconstrues the law, I am constrained to follow it.” Id at 21.
Ultimately, the court agreed that based on plaintiffs’ theory of the case, plaintiffs’ expert provided common proof of impact. The court also accepted plaintiffs’ proposed method for calculating an aggregate damages figure for the entire class. The court found that the evidence showed that “Sutter’s prices were well above the average in Northern California” and “[a]lmost all class members were subject to those prices.” Order at 15.
The class certification order in UFCW v. Sutter Health provides a good overview of California state court class certification jurisprudence – this is something of a rarity, as most modern class actions are prosecuted in federal court under CAFA. The case itself may also be “one to watch” for practitioners whose practice areas involve health care mergers, or issues involving potential geographic restraints in the delivery of health care services.
Heather T. Rankie
In a 2-1 decision issued on September 7, 2017, the U.S. Court of Appeals for the Eleventh Circuit reversed dismissal of antitrust and state-law claims brought by automobile body shops against auto insurance companies in Quality Auto Painting Center of Roselle, Inc. v. State Farm Indemnity Co., 870 F.3d 1262 (11th Cir. 2017). The body shops alleged two categories of antitrust violations: (1) horizontal price fixing by setting a “market rate” to benefit insurance companies; and (2) boycott by way of steering insureds away from body shops charging more than the “market rate” by making false or misleading statements about the quality and integrity of such body shops and their work. The body shops also alleged claims for unjust enrichment, quantum meruit, and tortious interference with the shops’ potential business. The majority opinion was authored by Judge Wilson. Judge Anderson concurred in the result of the reversal of the tortious interference claim, and dissented in all other respects.
Horizontal Price Fixing Claim
In addressing the horizontal price fixing claims, the Eleventh Circuit recited the rule that allegations of an inferred agreement must show both “parallel conduct” and “plus factors.” Id. at 1271–72. The court held the body shops plausibly established parallel conduct by alleging the insurance companies utilized the same labor rates and materials costs, as well as employing the same line of tactics to depress those rates and costs. Id. at 1271. The court further held two plus factors supported a plausible inference of an illegal agreement: (1) the presence of “[c]ustomary indications of traditional conspiracy”; and (2) uniform practices. Id. at 1272–74 (alteration in original).
Concerning the first plus factor, the court noted one customary indication of traditional conspiracy is adoption of uniform prices despite variables that would ordinary result in divergent prices. Id. at 1273. As the body shops alleged, the insurance companies utilized State Farm’s market rate, despite variables that would typically result in divergent reimbursement. Such variables included: different market areas, relationships with certain body shops, and the ability to differentiate themselves using higher quality parts and labor. Id. The court held these facts provided a customary indication of traditional conspiracy and contributed to a plausible inference of illegal agreement. Id.
The court also found the second plus factor—uniform practices—supported a finding of illegal agreement. The body shops alleged the insurers required body shops to repair rather than replace faulty parts and to offer concessions or discounts. Id. at 1274. The insurers also made false and misleading statements aimed at forcing compliance with the market rate, such as disparaging the work of non-compliant body shops. Id. The court held that this “collection of tactics” contributed to a plausible inference of an illegal agreement. Id.
The court rejected various arguments against the plausible inference of an illegal agreement. First, the Eleventh Circuit made clear “allegations directly supporting the existence of an agreement, such as form (written or oral) and date of entry, are unnecessary for a plausible claim of horizontal price fixing. In the absence of direct evidence of an agreement, the allegations necessary are those that plausibly establish parallel conduct and further factual enhancement.” Id. at 1274. Second, the court rejected the argument that an agreement to fix a price “ceiling” is not actionable, confirming that agreements to fix maximum prices are per se violations. Id. Third, while the insurance companies argued the plus factors were not properly before the court because their existence was only argued on appeal, the court confirmed the use of the phrase “plus factors” is not necessary to permit the use of such factors on appeal when the body shops had consistently argued the allegations support an inference of illegal agreement. Id.
The majority characterized Judge Anderson’s dissent as “agreeing with the existence of parallel conduct” but “argu[ing] that the proposed plus factors fail to ‘bear the weight attributed to them.’” Id. at 1274 (quoting dissent). Concerning the first plus factor—adoption of uniform prices despite variables that would usually result in divergent prices—Judge Anderson observed that parts necessary for repairs are “ubiquitous, interchangeable, and standardly priced.” Id. at 1284. The majority deemed this as outside “judicial experience” or “common sense,” and also an inference in favor of defendants rather than claimants. Id. at 1275. Judge Anderson also believed the conduct alleged was more akin to “price leadership,” rather than agreement on a particular price, because State Farm’s market rate was not alleged to be a secret and is followed by other insurers. Id. at 1282–84. Concerning the second plus factor—uniformity of tactics related to parts and discounts—the dissent argued these tactics “are among the most common and time-worn methods of increasing corporate profits in any industry” and an inference of prior agreement is not warranted from “the mere fact that several insurance companies adopt policies favoring use of cheaper parts and offering discounts.” Id. at 1285–86. The controlling opinion rejected these arguments, noting they are based on external knowledge about industry practices and “derogat[e] the severity of the tactics alleged in the complaint.” Id. at 1275. For the above reasons, the court reversed dismissal of the body shops’ horizontal price fixing claims.
The court also held the body shops stated a claim for per se violation of boycotting by alleging that the insurers used identical tactics to keep the insureds away from non-compliant shops. Id. at 1276. Judge Anderson dissented, arguing that the tactics were not uniform because insurance companies can choose from an ambit of tactics, analogous to the choice between different transportation types (car, bike, train, etc.). Id. at 1287–88. The majority rejected the analogy because it “belies allegations in the complaint that each tactic was misleading or false” and together the tactics “create an idiosyncrasy, the repetition of which is hardly ‘common.’” Id. at 1276.
State Tort Claims
Finally, the court reversed dismissal of three state tort claims: unjust enrichment, quantum meruit, and tortious interference. The majority disagreed with the district court and the dissent that the body shops’ unjust enrichment claims are based on unsatisfactory bargaining because the body shops knew in advance how much they would be paid. Id. at 1277. The majority held the insurers forced the shops to perform repairs involuntarily at the low market rate, and any dealing between the parties was based on an invalid, unenforceable contract. Id. at 1277–78.The majority further rejected the dissent’s concern that parties could therefore renege on contract terms, because the complaint established no bargaining occurred that could support the existence of an enforceable agreement. Id. at 1278.
As to quantum meruit, the majority held the body shops stated viable claims by alleging receipt of artificial, below reasonable value compensation for their services. Id. at 1278–79. The dissent disagreed because the body shops alleged insurers informed them what they were willing to pay, and the only reasonable expectation from this was that the body shops expected to receive the market rate. Id. at 1293.
As for the tortious interference claims, the court addressed the district court’s concern with the body shops’ “group pleading,” which it believed prevented the shops from tailoring allegations to each state, holding that the allegations were sufficiently tailored to conclude plausibility as to the laws of each state. Id. at 1279. The Eleventh Circuit also held it not fatal that specific allegations were not made as to each defendant or corporate family because uniformity of prices and practices were alleged. Id.
Rafey S. Balabanian and Aaron J. Lawson
Illinois’s Biometric Information Privacy Act (“BIPA”) prohibits – absent informed consent – the collection of “scan[s] of … face geometry.” 740 ILCS 14/10. But the statute expressly does not prohibit the collection of information derived from photographs. Id. Can a scan of face geometry be unlawfully extracted from a photograph? That was the question before the Court in Monroy v. Shutterfly, Inc., 2017 WL 4099846 (N.D. Ill. Sept. 15, 2017). And Monroy, following two other decisions, Rivera v. Google, Inc., 2017 WL 748590 (N.D. Ill. Feb. 24, 2017), and In re Facebook Biometric Info. Privacy Litig., 185 F. Supp. 3d 1155 (N.D. Cal. 2016), concluded that the answer is yes.
Monroy also addressed three other issues that recur frequently in suits under the BIPA: whether a specific application violates the presumption against extraterritoriality, whether a particular application violates the Dormant Commerce Clause, and whether actual damages are required to state a claim under the BIPA. As to the first two issues, the court decided to defer consideration until summary judgment, and as to the latter, the court concluded that actual damages are not required.
I. Scans of Face Geometry
Defendant Shutterfly, Inc., operates a website that allows users to upload, share, and organize digital photos. 2017 WL 4099846, at *1. One feature that Shutterfly offers within this service is the ability to “tag” individuals in photos that are uploaded. Id. In order to make that feature work, Plaintiff Alexander Monroy, alleged, Shutterfly generates and stores “face templates” of individuals who are already tagged in photos uploaded to Shutterfly’s platform, and then compares the faces detected in new photos against that existing database. Id. These face templates, Monroy alleged, consisted of an analysis of “the unique contours of his face and the distances between his eyes, nose and ears.” Id. The process of extracting that data from photographs and generating face templates, Monroy asserted, runs afoul of the BIPA’s prohibition on the collection of scans of face geometry. Id.
Shutterfly’s principal argument was that its creation of face templates from photographs isn’t governed by the BIPA because the collection of any information from a photograph is excluded from the BIPA’s coverage. Id. at *2. A scan of face geometry, Shutterfly argued, had to be collected in person. Id. The Monroy court, like the Rivera and Facebook courts before it, rejected that argument. There was no textual clue, the Court explained, that required limiting the BIPA’s coverage to the in person collection of biometric information. Id. at *3. Furthermore, that kind of limiting construction did not comport with the Illinois legislature’s intent to have the law apply expansively, or its recognition that biometric technology was advancing. Id. at *3-*4. Given the statute’s broad language, and the legislature’s intent, the Court concluded that a scan of face geometry could unlawfully be extracted from a photograph.
That point, it seems, is essentially settled. Monroy, Rivera, and Facebook all reach the same conclusion. Critically, though, no decision addresses what a “scan of … face geometry” actually is. Monroy alleged that Shutterfly’s face templates used information such as the distance between his facial features. From a lay perspective that certainly seems like a scan of face geometry, and Shutterfly’s decision not to contest the sufficiency of those allegations comports with that understanding. But discovery may show that Shutterfly’s algorithms work differently, or that the picture is more nuanced than Monroy alleges. No decision yet has applied the BIPA’s prohibition on the collection of scans of face geometry to a specific method of face recognition technology. That question, it seems, awaits litigants at summary judgment.
II. The Dormant Commerce Clause and Extraterritoriality
Shutterfly also objected that to apply the statute to its face-recognition software would constitute an impermissible application to conduct occurring outside of Illinois. As a statutory matter, Shutterfly invoked Illinois’ presumption against extraterritoriality. As a constitutional matter, Shutterfly urged that application of the BIPA to activity occurring on its California servers would result in Illinois regulating out-of-state conduct in violation of the Dormant Commerce Clause. The court, following the approach taken by Rivera, deferred consideration of these questions until the parties had more fully developed the record. Id. at *8.
That brief ruling (which, as explained below, is almost certainly procedural correct from a procedural standpoint) is likely to be particularly maddening. The crux of the Court’s substantive reasoning appears to have been that it isn’t problematic, at least as a general matter, for Illinois to regulate the collection of biometric information anywhere in the state. Id. at *7. That reasoning makes good sense, though defendants are likely to balk at the consequences.
For instance, Monroy himself is a Florida resident. His connection to Illinois, at least for the purposes of this suit, is that his photo was uploaded—thus enabling Shutterfly’s alleged collection of biometric information—from Chicago. But if no more is required to permit a plaintiff from invoking the BIPA, then nationwide class actions under the BIPA are almost certainly permissible. (Shutterfly will surely argue, as the case proceeds, that any biometric information is harvested on its servers, which may be located around the country. It is not clear from the Monroy court’s discussion that this would be a relevant factual distinction.) From a choice-of-law perspective, at least, a nationwide class-action under an Illinois state law seems problematic, though the Seventh Circuit has repeatedly said that, in the class-action context, choice-of-law questions are best addressed at class certification, not at the motion to dismiss stage. See Morrison v. YTB Int’l, Inc., 649 F.3d 533, 535 (7th Cir. 2011). Morrison also points out that the extraterritoriality analysis contemplated by the Illinois Supreme Court’s decision in Avery v. State Farm Mutual Auto. Insurance Co., 835 N.E.2d 801, 849-55 (Ill. 2006), requires a developed record, and so in the ordinary case won’t be ripe for resolution on the pleadings. Because courts address statutory issues before reaching constitutional issues, defendants wishing to raise extraterritoriality and Dormant Commerce Clause arguments in BIPA cases will need to be prepared to litigate their cases through class certification, if not summary judgment.
The Monroy court’s brief discussion of the Dormant Commerce Clause also likely means that one of the defense bar’s favorite cases to invoke in Internet-related lawsuits can be discarded as obsolete. In American Libraries Ass’n v. Pataki, 969 F. Supp. 160 (S.D.N.Y. 1997), the district court concluded that essentially any state regulation of the Internet is likely to be invalid given the global, interconnected nature of the Internet. The Second Circuit reasoned six years after that that the Internet was likely immune from state-level regulation. Am. Booksellers Found. v. Dean, 342 F.3d 96, 104 (2d Cir. 2003). Though never overruled, those cases have not stood the test of time. Shutterfly invoked those cases in its motion. That the district court in Monroy saw no need even to comment on them speaks volumes about their persuasive value.
III. Actual Damages
Finally, Shutterfly argued, without success, that Monroy’s claim should be dismissed because he had failed to allege any “actual damages.” 2017 WL 4099846, at *8. Whether actual damages are required to state a claim under the BIPA has divided courts. In Illinois, two trial-level courts have concluded that actual damages are not required, while one has disagreed. See Sekura v. Krishna Schaumberg Tan, Inc., 2017 WL 1181420, at *2-*3 (Cir. Ct. Cook Cnty. Feb. 9, 2017) (reviewing debate). An interlocutory appeal is currently pending in the Illinois Appellate Court’s Second District (covering most of northern Illinois), and another interlocutory-appeal petition is currently before the Illinois Appellate Court’s First District (which covers Chicago and Cook County). Hopefully any confusion will be resolved soon.
What is innovative about the Monroy decision, however, is its willingness to entertain the idea that an invasion of privacy is “actual damages. Id. at *9. The court concluded that, as a matter of statutory interpretation, “actual damages” aren’t required under the BIPA, but it left open the door for a holding that an invasion of privacy satisfies this requirement. See also FAA v. Cooper, 566 U.S. 284, 293-94 (2012) (observing that the term “actual damages” has a “chameleon-like quality” such that “[t]he term is sometimes understood to include nonpecuniary harm” but in other contexts “the term has been used or construed more narrowly to authorize damages for only pecuniary harm”). The Illinois decisions all turned on whether pecuniary harm was or was not required. Monroy suggests that that debate may well be beside the point. It will be interesting to see if the Illinois Appellate Courts take Monroy up on this suggestion.
Monroy v. Shutterfly broke little new ground, but its reasoning could have significant consequences in future BIPA litigation. In Monroy, Rivera, and Facebook, two questions of statutory interpretation loom large: (1) What amount of conduct must occur in Illinois for application of the statute to comport with Illinois’s presumption against extraterritoriality, and (2) What type of harm must an individual suffer before they can state a claim under the BIPA? Monroy offers sensible substantive answers to those questions. If those answers hold sway in other cases, litigation will turn to the operation of the technology at issue, a focus that is likely to provide more concrete guidance to companies and consumers moving forward.
Pritzker Levine LLP
On October 18, 2017, the Third Circuit Court of Appeals, in Cottrell v. Alcon Laboratories, et al., Case No. 16-2015, reversed a District Court decision that had dismissed plaintiffs’ entire suit on Article III standing grounds.
In Cottrell, consumers of prescription eye medication allege that manufacturers and distributors of the medication packaged it in such a way as to cause users to waste much of it. The entire action was dismissed by the District Court on the grounds that there was no jurisdiction because, the court found, consumers lacked standing to bring claims of violations of the consumer protection statutes of six states: California, Florida, Illinois, New Jersey, North Carolina and Texas.
Defendants manufacture and distribute prescription eye drop medications used to treat serious medical conditions, including glaucoma, in both brand-name and generic forms. These medications are prepared in liquid form and sold in bottles which contain built-in dropper tips for dispensing the medicine directly into a user’s eye. Plaintiffs are consumers who have been prescribed these eye drops and whom, without these medications, risk blindness or worsening eye sight. Opinion, at 9.
The bottles are pre-packaged with a fixed amount of medication, sold at set prices. The dimensions of the dropper tip dictate the size of the drop dispensed from that bottle. The dropper size is selected solely by defendants and patients do not have the ability to administer less than one full drop into his or her eye or to alter the dropper tip size. Id. at 9.
The Third Circuit noted that a “plethora” of scientific research conducted over the past forty years reveals that an adult has a capacity of approximately 7 to 10 microliters (µL) of fluid per eye. If more than that amount is dispensed into an adult’s eye, the medication is expelled and confers no benefit upon the user, and, in fact, excess medication may enter a patient’s bloodstream via their skin or tear ducts and cause harmful systemic side effects. These studies concluded that the medicinal droppers should therefore administer between 5 to 15 µL per drop in order to safely confer the necessary amount of liquid medication to an adult patient’s eye. Id. at 9.
Plaintiffs allege that defendants manufacture or distribute bottles with large dropper tips so that more fluid is expended with each dose than necessary, thereby wasting a large portion of the medicine. In fact, a 2008 study showed that each defendant’s drop size was more than two to three times the 15 µL recommended size, with some drops being as large as 50 µL. Id. at 10. As a result, they contend, the medications run out more quickly and consumers must pay for more bottles than if the droppers distributed only the necessary microliters of medicine. In one example from the 2008 study which plaintiffs referred to in their complaint, Allergan’s glaucoma drug Alphagan P was sold in a 5 milliliter (mL) bottle, with a large drop size of 43 µL. At that drop size, a patient would go through 18.25 bottles a year if using the medicine as prescribed; three times per day. If the drop size was limited to 16 µL, then a patient would need only 6.46 (or 7) bottles per year. With each bottle having a cost of $104.99 in 2013, the additional costs to patients are significant. Id. at 11-12.
Plaintiffs’ original complaint, filed in September of 2014, alleged that defendants’ manufacture and distribution of these products violated six state consumer protection laws as unfair or unconscionable trade practices. Plaintiffs’ amended complaint was filed in June 2015 in response to the District Court’s order dismissing the original complaint for lack of standing without prejudice to plaintiffs’ ability to cure the deficiencies. The amended complaint cites to scientific literature opining on costs savings by using a smaller drop size and includes charts showing each plaintiff’s relevant expenses. Id. at 14. Defendants again moved to dismiss on the grounds of lack of standing, federal preemption, and failure to state a claim. The District of New Jersey granted the motion and dismissed the action in its entirety, finding plaintiffs lacked standing and did not reach the issues of preemption and sufficiency of plaintiffs’ claims. Id.
Article III Standing Analysis
The Third Circuit Court of Appeal disagreed with the District Court, finding that plaintiffs had met their burden of alleging they had suffered an injury in fact, which was the Article III standing element that the District Court had found plaintiffs failed to establish. Id. at 15.
To sufficiently allege injury in fact, a plaintiff must claim that he or she suffered an invasion of a legally protected interest that is concrete and particularized and actual or imminent, not conjectural or hypothetical. Id. at 17 citing Spokeo, Inc. v. Robins, 136 S.Ct. 1540, 1548 (2016) (quoting Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992). The Court of Appeals noted that “[t]ypically, a plaintiff’s allegations of financial harm will easily satisfy each of these components, as financial harm is a ‘classic’ and ‘paradigmatic form’ of injury in fact”, citing Danvers Motor Co., Inc. v. Ford Motor Co., 432 F.3d 221, 291, 293 (3d Cir. 2005), and was also critical of the District Court for engaging in a generalized abstract discussion which improperly crossed over into a merits analysis. Id. at 17-18. The Third Circuit, in support of its decision, painstakingly addressed each element necessary to confer Article III standing.
1. Invasion of a Legally Protected Interest
The Court of Appeals explained that, in order to conduct the proper analysis to determine whether an injury in fact had incurred, a court must recognize the following: First, whether a plaintiff has alleged an invasion of a legally protected interest “does not hinge on whether the conduct alleged to violate a statute does, as a matter of law, violate the statute.” To undertake an analysis in this manner would improperly “collapse” courts’ evaluation of standing with a Federal Rule of Civil Procedure 12(b)(6) merits evaluation, and every losing claim would be dismissed for lacking standing in the first place. Id. at 19. Second, the Supreme Court “has repeatedly recognized that financial or economic interests are legally protected interests for purposes of [standing].” Id. at 20 [internal citations omitted]. Third, a legally protected interest can arise from the Constitution, from the common law, or “’solely by virtue of statutes creating legal rights, the invasion of which creates standing’”. Id., citing to Lujan, supra, 504 U.S. at 576-578. Fourth, the interest asserted is related to the injury in fact, and is not just a byproduct of the litigation. Id., at 21, citing to Vermont Agency of National Resources v. United States, 529 U.S. 765, 772-73 (2000).
Plaintiffs’ claims, the Court of Appeals found, “fit comfortably” within these categories: plaintiffs’ claim economic interests: the money they had to spend on medication that was impossible to use in a way that would not incur that spending; they seek monetary compensation for defendants’ conduct; and their claims arise from state consumer protection statutes that provide monetary relief to those damaged by the business practices that violate those statutes. Id. at 21.
Defendants’ arguments relied heavily on a recent Seventh Circuit decision, Eike v. Allergan, Inc., 850 F.3d 315 (7th Cir. 2017), that concerned materially identical allegations against many of the same defendants. The Seventh Circuit, like the District of New Jersey, concluded that plaintiffs had failed to allege a legally protected interest and dismissed their claims for lack of Article III standing.
In Cottrell, the Third Circuit opines that the Seventh Circuit got it wrong because it incorrectly focused solely on the “fraudulent” business practices elements of states’ consumer protection statutes, wholly ignoring their unfair or unlawful conduct prongs which also constitute violations, and which the Eike plaintiffs had actually brought their claims under. Id. at 22-26. The Third Circuit also believes that the Eike decision improperly “flips the standing inquiry inside out, morphing it into a test of the legal validity of the plaintiffs’ claims of unlawful conduct.” Id. at 22-23 (“[b]ut as we have already emphasized, a valid claim for relief is not a prerequisite for standing”).
2. Concrete Harm
The next element necessary to effectively plead injury in fact is whether the injury is concrete, meaning it is real, actually exists, and is not abstract. Id., at 26, citing to Spokeo, 136 S.Ct. at 1548. Plaintiffs satisfy this element because they allege that defendants’ violations of the consumer protection statutes caused each plaintiff tangible, economic harm. Id. at 27.
3. Particularized Injury
A third and distinct component of pleading an injury in fact is that the injury must also be particularized, i.e. that each plaintiff be injured in a particular way. Id. at 27. The Court of Appeals held that, because each plaintiff alleges that he or she personally incurred economic harm in purchasing medication that was impossible for him or her to use, “[t]here can be no dispute that this harm is particularized.” Id. at 27.
4. Actual or Imminent Damages
Lastly, the Third Circuit held that the plaintiffs met the fourth element of pleading an injury in fact because the Cottrell plaintiffs sufficiently allege actual or imminent, as opposed to conjectural or hypothetical, damages. The amended complaint proposes two theories to measure plaintiffs’ financial harm: (1) the measure of the cost difference between what they would have paid for their course of medication from smaller tipped bottles and what they actually paid for the larger tipped bottles they bought (called the “pricing theory”); or (2) the value of total overflow from each drop administered that was impossible for them to use (the “reimbursement theory”). Id. at 28. The value of damages works out to be the same under both theories. The Court of Appeal chided the District Court for rejecting the “pricing theory” as being too speculative and for misinterpreting plaintiffs’ explanations of their economic harm. Id. at 28-29. Plaintiffs’ amended complaint, in fact, cites specific examples, the 2008 scientific study, and “numerous other scientific studies”, which support that, if the drop size were limited by changing the size of the dropper, then more doses could be dispensed from a single bottle, and a patient would require less bottles over the course of their treatment. Id. at 29-30. Contrary to the District Court’s determination, this theory does not rely on speculation as to whether defendants would have reduced its bottle sizes and attendant prices. Regardless of whether the cost of the bottles changed, patients would require less of them, thereby saving money. Id. Furthermore, these were injuries plaintiffs allege already occurred, for medication they have already used, and therefore were not conjectural. Id. at 28. As to the reimbursement theory, the District Court rejected it outright because it is not a theory previously recognized in fraud cases. However, the Cottrell plaintiffs did not assert fraudulent conduct as the basis of any of their consumer claims, as discussed above, and therefore this reasoning was not appropriate in the context of the Cottrell case. Id. at 31.
Defendants Falcon, Sandoz, and Akorn, who are generic manufacturers, also raised federal preemption on appeal, arguing that the FDA does not permit them to unilaterally change their bottle droppers without approval, and therefore federal impossibility preemption bars plaintiffs’ claims against them. The generics also argued that preemption applies because the FDA requires generic products to have the same bottle design as their brand name equivalents. The Third Circuit noted that plaintiffs argued in response that that some manufacturers have, in fact, changed their drop volumes over time without seeking FDA approval, and that drop sizes already differ between manufacturers.
The Court of Appeal, however, did not otherwise address the preemption arguments, since the District Court had not reached the issue of preemption in its underlying decision. The Third Circuit remanded the case to the lower court for further disposition.
Spokeo’s multi-factor inquiry introduces a fair amount of ambiguity into the Article III analysis. The Third Circuit opinion in Cottrell adds to an increasing line of cases that provide guidance to what plaintiffs must plead to allege injury in fact in cases that involve intangible injuries, post Spokeo.
Peter Huston and Angelo Suozzi
Sidley Austin LLP
The Third Circuit recently held that evidence of parallel price increases and other circumstantial evidence was insufficient to show a price-fixing conspiracy, but instead indicated legal “conscious parallelism” by competitors. Valspar Corp. v. E. I. DuPont De Nemours & Co., No. 16-1345, 2017 WL 4364317 (3d Cir. Sept. 14, 2017). The key takeaways:
The market for titanium dioxide – a pigment used in paint and other coatings – is characterized by high barriers to entry and dominated by a handful of firms. Id. *1. Valspar, a large-scale purchaser of titanium dioxide, alleged that a group of titanium dioxide suppliers, including DuPont, conspired to increase prices between 2002 and 2013, resulting in unlawful overcharges. Id.
To support its theory, Valspar pointed to 31 announced parallel price increases among the alleged conspirators over the 12-year period. Id. In the absence of direct evidence of a conspiracy, Valspar alleged circumstantial evidence, including that (1) the suppliers participated in meetings and data sharing through an industry association; (2) the suppliers used industry consultants to funnel information among each other; and (3) there were various internal emails among the suppliers discussing discipline, price increases, and market share. Id. *8-9
The District Court for the District of Delaware granted summary judgment in favor of DuPont in 2016, finding that there was no evidence of an actual agreement to fix prices. Valspar Corp. v. E.I. du Pont de Nemours, 152 F. Supp. 3d 234 (D. Del. 2016).
The Third Circuit’s Opinion: “Conscious Parallelism,” Not Conspiratorial Conduct
The appellate court agreed that the 31 parallel price increase announcements were not indicative of a conspiracy. Instead, the price increases were consistent with “conscious parallelism,” which holds that competitors in an oligopolistic market will raise prices in response to rivals’ price increases, if they believe it will maximize industry profits. Id. *5. Since these parallel price increases did not show anything beyond the “mere interdependence” among suppliers typical to an oligopolistic market, the court found that this evidence was insufficient, without more, to create a reasonable inference of a conspiracy. Id.
To establish a conspiracy, Valspar needed to present sufficient evidence to show that the suppliers exchanged assurances of common action or adopted a common plan. Id. *8. The court found that the circumstantial evidence presented by Valspar was weaker than similar evidence in cases where summary judgment had been granted, and in total failed to raise an inference of conspiracy. Id.
First, the participation by DuPont and other competitors in a data sharing program where anonymized data was shared and redistributed by a trade association was insufficient to show a conspiracy because there was no evidence that price information was collected and the data did not allow suppliers to calculate competitors’ market shares. Id. Relatedly, Valspar’s claim that the alleged conspirators used meetings to communicate pricing plans was insufficient because it only showed opportunity to conspire, but not proof of an actual agreement. Id. *9.
Nor was Valspar’s claim that the conspirators used industry consultants to funnel information among each other probative of conspiracy, but instead was consistent with rational behavior in an oligopoly – suppliers would want to obtain as much information as possible about their competitors. Id. *9. Further, although certain emails among competitors that discussed price and market share raised “some suspicion” of anticompetitive conduct in the court’s mind, the court ultimately found that those emails simply showed that suppliers were implementing expected pricing strategies in response to conscious parallelism. Id. Last, certain below-market inter-competitor sales did not support a theory of profit redistribution, as many sales were made in emergency situations or in connection with cross-licensing agreements. Id. *10.
In total, the court found that the evidence was not “close to showing” that a conspiracy was more likely than not, and affirmed the district court’s verdict. Id.
Dissent: “An Unworkable Burden”
In a strongly worded dissent, Judge Stengel (Chief U.S. District Judge for the Eastern District of Pennsylvania, sitting by designation) found that the majority had imposed an “unworkable burden” for plaintiffs seeking to prove an antitrust price-fixing case with circumstantial evidence. Id. *11-12. The dissent analyzed the circumstantial evidence and found that there were sufficient factual issues to send the case to a jury. Id. In particular, the “sheer number” of parallel price increases and inflammatory language in emails among competitors relating to pricing indicated that there was sufficient evidence of conspiracy to survive summary judgment. Id. *13.
Valspar has filed a petition for rehearing en banc before the Third Circuit Court of Appeals.
Opposite Result Reached In Titanium Dioxide Litigation in Maryland
The import given to circumstantial evidence in a price-fixing case involving an oligopolistic market may depend on the forum in which the case is brought.
Prior to filing suit in the case against DuPont, Valspar opted out of a class action suit in the U.S. District Court for the District of Maryland by a class of titanium dioxide purchasers against DuPont and other suppliers. Although faced with substantially the same record as the Delaware District Court in Valspar, the Maryland District Court denied the suppliers’ summary judgment motion in that case, finding – similar to the dissent in Valspar – that the “sheer number of price increases” and the various inter-competitor communications regarding pricing raised “ample evidence” of conspiracy, such that a jury could conclude that the suppliers agreed to raise prices. In re Titanium Dioxide Antitrust Litig., 959 F. Supp. 2d 799 (D. Md. 2013). The parties settled the class action suit before trial.
The Third Circuit’s ruling in Valspar holds that evidence of mere parallel conduct in oligopolistic markets is insufficient, without more, to establish a price-fixing conspiracy. In light of the Valspar opinion, it will become relatively more difficult for a plaintiff in the Third Circuit to successfully establish an antitrust price-fixing claim through purely circumstantial evidence in an oligopolistic market.
The Third Circuit’s opinion also appears to hold plaintiffs to a higher standard in that circuit to come forward with clear, compelling circumstantial evidence when alleging price fixing in an oligopolistic market.
By their nature, however, antitrust price-fixing cases are highly fact-dependent, and antitrust suits may still be brought by plaintiffs based solely on circumstantial evidence. Such evidence may not only include private communications between competitors, but may also include public statements or announcements made by one competitor that lead to action by others. The impact of such emails and public statements will depend on a variety of fact-specific issues, including the specific subjects of the communication and the timing of the communication in relation to the allegedly collusive actions. Depending on the facts, however, circumstantial evidence alone may be sufficient to survive summary judgment and proceed to trial.
Further, it is clear that courts in different circuits may reach different results in assessing whether circumstantial evidence is sufficient, even when faced with the same set of facts, as evidenced by the competing judgments in the Valspar and Titanium Dioxide cases.
Eric W. Buetzow
On September 17, 2017, Judge Bartle of the Eastern District of Pennsylvania granted partial summary judgement to the FTC in its case against Abbvie, maker of the transdermal testosterone therapy drug, AndroGel, while denying cross summary judgment motions by Abbvie and affiliated entities. FTC v. Abbvie Inc., No. 14-5151, slip op. (E.D. Pa. Sept. 17, 2017).
The FTC asserts that Abbvie unlawfully maintained its monopoly in violation of Section 5(a) of the Federal Trade Commission Act (15 U.S.C. § 45(a)) by initiating sham patent litigation against two competitors, Teva and Perrigo, who were primed to introduce generic products into the testosterone gel market to compete with branded AndroGel. Id. at 1-2. Teva and Perrigo had applied to the FDA for approval of their generic versions of the drug, which use different skin “penetration enhancers” but were otherwise similar to AndroGel. Id. at 9. Abbvie then initiated patent infringement suits against both Teva and Perrigo, alleging infringement of Abbvie’s patent for AndroGel—even though the patent did not list those penetration enhancers used by the generics. Id. at 3-9.Under 21 U.S.C. § 355(c)(3)(C), Abbvie’s filing of the infringement actions automatically triggered a 30-month stay of the FDA approval needed for launch of generic products, thus delaying entry of the Teva and Perrigo products into the market where they stood to compete with AndroGel. Id. at 9.
“Objectively Baseless” Sham Litigation
The FTC sought partial summary judgment pertaining to whether Abbvie willfully acquired or maintained monopoly power by filing sham patent infringement litigation against Teva and Perrigo. Id. at 11. Such conduct does not fall within the protections of the Noerr-Pennington doctrine immunizing lawful petitioning activity. Id. Demonstrating that patent infringement actions are a sham, and thus not protected under Noerr-Pennington, involves proving two sub-elements: (1) the lawsuits are objectively baseless; and (2) the defendants subjectively intended to interfere directly with a competitor’s business interests using government process as an anticompetitive weapon. Id. at 12. The FTC and Abbvie cross moved for summary judgement as to the “objectively baseless” element of the sham litigation claim, while Abbvie’s motion also argued that the FTC cannot prove the requisite monopoly power for illegal monopolization. Id.
As stated by the Supreme Court, litigation is objectively baseless if “no reasonable litigant could realistically expect success on the merits,” or if the defendant lacked a “a ‘reasonabl[e] belie[f] that there is a chance that [the] claim may be held valid.” Id. (quoting Prof’l Real Estate Inv’rs, Inc. v. Columbia Pictures Indus., Inc. (“PRE”), 508 U.S. 49, 57, 62-63 (1993)). Abbvie argued that, even though its patent did not expressly include the skin penetration enhancers used in Teva’s and Perrigo’s generic formulations, the patent infringement suits were justifiable based on the doctrine of equivalents, which provides that “[t]he scope of a patent is not limited to its literal terms but instead embraces all equivalents to the claims described.” Id. at 13-14 (quoting Festo Corp. v. Shoketsu Kinzoku Kogyo Kabushiki Co. (“Festo VIII”), 535 U.S. 722, 732 (2002)).
The FTC did not dispute that the penetration enhancers used by Perrigo and Teva were insubstantially different from that used in AndroGel 1% and disclosed in the patent. Rather, the FTC argued that Abbvie was legally precluded from claiming infringement for equivalents under the doctrine of prosecution history estoppel, since the public patent prosecution history clearly and affirmatively demonstrated that Abbvie surrendered any claim of protection for the penetration enhancers used by Teva and Perrigo. Id. at 14.
“Prosecution History Estoppel” Doctrine Precluded the Claimed Basis for Litigation
In general terms, the doctrine of prosecution history estoppel balances rights of patentees with the interest of the public in understanding the limits of the patent so that the public may “be encouraged to pursue innovations, creations, and new ideas beyond the inventor’s exclusive rights.” Id. at 15 (quoting Festo VIII, 535 U.S. at 731-32). The purpose is to hold the patentee to the representations made during the application process and to the inferences that may reasonably be drawn from narrowing amendments made in obtaining the patent. Id.
The first step in determining whether prosecution history estoppel bars defendants from claiming the doctrine of equivalents is for the court to determine that “an amendment filed in the Patent and Trademark Office (“PTO”) has narrowed the literal scope of a claim,” considering the entire application history. Id. at 16-17 (quoting Festo Corp. v. Shoketsu Kinzoku Kogyo Kabushiki Co. (“Festo IX”), 344 F.3d 1359, 1366 (Fed. Cir. 2003)). The court found that through multiple amendments, Abbvie “without question narrowed the claimed penetration enhancers . . . from all penetration enhancers including those used in the Teva and Perrigo products to only isopropyl myristate at a particular concentration [as used in AndroGel].” Id. at 17. Indeed, these amendments occurred after the patent examiner had rejected an initial claim for “all penetration enhancers.” Id.
The second step for applying prosecution history estoppel requires the court to determine that “the reason for that amendment was a substantial one relating to patentability.” Id. at 18. This is initially presumed to be true, but the defendant can overcome this presumption by pointing to objective evidence in the prosecution history record. Id. Abbvie did not contest that at least some of their amendments were made for the purpose of patentability, but instead argued for the “tangential relation” exception; that is, that “the rationale underlying the amendment  bear[s] no more than a tangential relation to the equivalent in question.” Id. at 19. Abbvie asserted that the amendments were intended to only relinquish other penetration enhancers not used by Teva or Perrigo. Id. at 20.
The court forcefully rejected this contention as a groundless “latter-day explanation,” unexpressed anywhere in the application filings, and objectively unreasonable in light of the broad initial rejection by the patent examiner, which the Defendants sought to “have the court ignore.” Id. at 21, 24-28. Defendants, the court found, had plainly disavowed all other penetration enhancers in order to obtain the AndroGel patent. Id. at 24, 28.
Third and finally, the court addressed the scope of the subject matter surrendered by Abbvie’s narrowing amendments. Id. Under Supreme Court precedent, “there is a presumption that the patentee has ‘surrendered all subject matter between the broader and the narrower language.’” Id. at 29 (quoting Festo VIII, 535 U.S. at 740). Finding that Abbvie possessed “no plausible argument” to overcome this presumption, the court concluded that “[p]rosecution history estoppel without question prevents the defendants from claiming that the doctrine of equivalents encompasses the penetration enhancers that they abandoned during the application process.” Id. at 29-30. The court further noted that the relevant law pertaining to sham litigation, the doctrine of equivalents, and prosecution history estoppel was all “well-settled at the time that defendants filed their lawsuits against Teva and Perrigo in 2011.” Id. at 30.
Under these principles, “the patent lawsuits against Teva and Perrigo were without question objectively baseless” the court held, and defendants could not have had “a reasonable belief that they had a chance to prevail.” Id. at 31. Accordingly, the court granted partial summary judgment in favor of the FTC on the objective baselessness element of its sham litigation claim for unlawful monopolization. Id. The court also denied defendants’ motion for summary judgment as to the issue of their monopoly power in the relevant market, stating that genuine disputes of material fact exist as to this “complex issue,” which “will have to await a trial.” Id. at 33.
Sarah Sheridan and Katherine Zhao
Simpson Thacher & Bartlett LLP
On June 26, 2017, in Miranda v. Selig, the Ninth Circuit reaffirmed baseball’s long-standing exemption from federal antitrust laws. 860 F.3d 1237 (9th Cir. 2017). Unlike all other sports—including professional basketball, football, and boxing—baseball enjoys an exemption from federal anti-monopolistic laws such as the Sherman Act. A review of the historical reasoning behind the exemption and an appreciation for the power of stare decisis helps explain this unique carve-out granted to our nation’s pastime.
Major League Baseball (“MLB”) consists of thirty MLB franchises or teams—such as the Los Angeles Dodgers, Boston Red Sox, and New York Yankees. Id. at 1238. In addition to approximately forty baseball players at the major league level, each team employs around 150 to 250 players who compete at the minor league level, known as the “farm system.” Id. MLB teams hope that some of their minor league players will develop into major league players. Id. The minor league players compete in minor league clubs and participate in training programs throughout the year. Id.
MLB requires all franchises to use a Uniform Player Contract, which sets forth the minor league players’ first-season monthly salary, when hiring new players. Id. at 1239. For subsequent years, each minor league player negotiates his salary with the club team. Id. If the parties cannot agree, the player’s salary is based on the same factors used to calculate the first-season salaries. Id. Unlike major league players, minor league players lack the benefit of a union. Id. As such, they must engage in salary negotiations independently. Id. The clubs typically fare much better than the players during these negotiations, as minor leaguers allege that most of them earn less than $7,500 per year, with some earning as little as $3,000 a year. See id. In fact, most minor league players receive no salary for spring training, during which they work fifty to sixty hours per week. Id.
To put the disparity between major and minor league players in perspective, the average annual salary for a major league baseball player is $4.47 million. See MLB salaries 2017: Earnings flatten out, while Clayton Kershaw leads pack, USA Today (Apr. 2, 2017, 10:41 PM), https://www.usatoday.com/story/sports/mlb/2017/04/02/mlb-salaries-payroll-2017/99960994/. By comparison, minor league hockey players averaged salaries of more than $90,000 in 2015. See Brian MacPherson, Minor league hockey players benefit from NHL relationship, Providence J. (Feb. 21, 2015, 11:15 PM), http://www.providencejournal.com/article/20150221/NEWS/ 150229777.
Against this backdrop, a class of minor league players sued the Office of the Commissioner of Baseball, former Commissioner Bud Selig, and all thirty MLB franchises (collectively, the “Owners”) in February 2015. Miranda, 860 F.3d at 1239. The class representatives alleged that they worked fifty to sixty hours per week yet earned less than $10,000 per year between 2010 and 2012. Id. They further alleged that MLB’s hiring and employment policies violate federal antitrust laws by restraining horizontal competition between and among MLB franchises, thereby “artificially and illegally depressing” minor league salaries. Id.; 15 U.S.C. § 1.
In September 2015, the U.S. District Court for the Northern District of California granted the Owners’ 12(b)(6) motion to dismiss, agreeing with the defendants that the minor leaguers failed to state a claim because the business of baseball is exempt from antitrust laws. Miranda, 860 F.3d at 1239. The minor leaguers appealed the decision to the Ninth Circuit. Id. In June of this year, the Ninth Circuit affirmed. Id. at 1240.
In upholding the baseball exemption from antitrust laws, the Ninth Circuit emphasized that it was “bound by Supreme Court and Ninth Circuit precedent upholding the business of baseball’s exemption from federal antitrust laws,” and that “Congress explicitly exempted minor league baseball in the Curt Flood Act of 1998.” Id. at 1239–40. For both reasons, minor leaguers had failed to state a claim. Id. Noting that the exemption “is best understood within its historical context,” the Ninth Circuit reviewed century-old jurisprudence upholding the exemption—including three Supreme Court decisions. Id. at 1240–42.
Baseball was first exempted from federal antitrust laws by the Supreme Court nearly one hundred years ago in Federal Baseball Club of Baltimore v. National League of Professional Baseball Clubs, 259 U.S. 200 (1922). In Federal Baseball, it was alleged that defendants had conspired to monopolize the baseball business by buying up competing clubs and inducing clubs to leave a competing league. Id. at 207. In a five-paragraph decision, the Supreme Court concluded that federal antitrust laws did not apply because “the business is giving exhibitions of baseball, which are purely state affairs,” and therefore any anticompetitive behavior did not constitute “an interference with commerce among the States.” Id. at 208–09. The Court reasoned that in our nation’s pastime, “the transport is a mere incident, not the essential thing.” Id. at 209. The exhibition itself—i.e. the playing of baseball—is the essential thing. Id.
Federal Baseball’s baseball exemptionwas affirmed about thirty years later by the Supreme Court in Toolson v. New York Yankees, 346 U.S. 356 (1953) (per curiam). In a one-paragraph decision, the Supreme Court upheld Federal Baseball, reasoning that “Congress has had the ruling under consideration but has not seen fit to bring such business under these laws by legislation having prospective effect. The business has thus been left for thirty years to develop, on the understanding that it was not subject to existing antitrust legislation.” Id. at 357. The Court concluded that it was the responsibility of Congress to bring baseball within the realm of antitrust laws, if it chooses to do so: “if there are evils in this field which now warrant application to it of the antitrust laws it should be by legislation.” Id. Justice Burton dissented on the grounds that “it is a contradiction in terms to say that the defendants in the cases before us are not now engaged in interstate trade or commerce.” Id. at 358. Justice Burton articulated the interstate nature of organized baseball in 1953:
In the light of organized baseball’s . . . capital investments used in conducting competitions between teams constantly traveling between states, . . . the attendance at its local exhibitions of large audiences often traveling across state lines, its radio and television activities which expand its audiences beyond state lines, its sponsorship of interstate advertising, and its highly organized ‘farm system’ of minor league baseball clubs, . . . it is a contradiction in terms to say that the defendants in the cases before us are not now engaged in interstate trade or commerce as those terms are used in the Constitution of the United States and in the Sherman Act, 15 U.S.C.A. ss 1—7, 15 note.
Id. at 357–58.
Following Toolson, the Supreme Court rejected the application of the baseball exemption to other sports such as professional boxing, United States v. Int’l Boxing Club of N.Y., 348 U.S. 236 (1955), professional football, Radovich v. Nat’l Football League, 352 U.S. 445 (1957), and professional basketball, Haywood v. Nat’l Basketball Ass’n, 401 U.S. 1204 (1971). In each case, the Court held that the Federal Baseball exemption did not extend beyond baseball, reasoning that it was the role of Congress, not the judiciary, to create additional exemptions.
For a third time, in 1972, the Supreme Court granted certiorari “to look once again at this troublesome and unusual situation,” and, albeit reluctantly, again upheld the baseball exemption in Flood v. Kuhn, 407 U.S. 258 (1972). In Flood, Curtis Charles Flood, one of the highest ranking major league outfielders in history, alleged antitrust violations after he was traded to the Philadelphia Phillies without first being consulted. Id. at 265. Flood complained to the Commissioner of Baseball and asked that he be made a free agent so that he could negotiate with any team. Id. Flood’s request was denied. Id.
The Supreme Court in Flood conducted a lengthy review of its prior cases relating to the baseball exemption. See id. at 269–80. The Court also considered the legislative history, noting that after “Toolson more than 50 bills have been introduced in Congress relative to the applicability or nonapplicability of the antitrust laws to baseball. A few of these passed one house or the other. Those that did would have expanded, not restricted, the reserve system’s exemption to other professional league sports.” Id. at 281 (footnote omitted). The Court acknowledged that while professional baseball is a business engaged in interstate commerce, it is “an exception and an anomaly.” Id. at 282. In particular, “Federal Baseball and Toolson have become an aberration confined to baseball.” Id. The Court concluded that “[e]ven though others might regard this as unrealistic, inconsistent, or illogical, . . . the aberration is an established one.” Id. (internal citation and quotation marks omitted). The Flood Court expressed its concern that confusion and retroactivity issues would result if it were to overturn Federal Baseball, and stated that any change should be made by Congress, which would have prospective effect. Id. at 283. Once again, following the principle of stare decisis, the Court left the issue to Congress to resolve:
If there is any inconsistency or illogic in all this, it is an inconsistency and illogic of long standing that is to be remedied by the Congress and not by this Court. . . . Under these circumstances, there is merit in consistency even though some might claim that beneath that consistency is a layer of inconsistency.
If there is any inconsistency or illogic in all this, it is an inconsistency and illogic of long standing that is to be remedied by the Congress and not by this Court. . . . Under these circumstances, there is merit in consistency even though some might claim that beneath that consistency is a layer of inconsistency.
Id. at 284.
After much prodding by the Supreme Court to legislate on the issue, Congress passed the Curt Flood Act in 1998. As noted by the Ninth Circuit in Miranda, the Curt Flood Act established that “the conduct, acts, practices, or agreements of persons in the business of organized professional major league baseball directly relating to or affecting employment of major league baseball players . . . are subject to the antitrust laws.” 15 U.S.C. § 26b(a). The Ninth Circuit pointed out, however, that the Curt Flood Act also “explicitly maintained the baseball exemption for anything related to the employment of minor league baseball players—including the use of reserve clauses—and the relationship between organized professional major and minor league baseball.” Miranda, 860 F.3d at 1242 (citing 15 U.S.C. § 26b(b)(1)–(2)).
Ultimately, the Ninth Circuit held that “[i]n light of Supreme Court precedent, the decisions of our Court, and the Curt Flood Act, minor league baseball falls squarely within the nearly century-old business-of-baseball exemption from federal antitrust laws.” Id. at 1243–44. The Ninth Circuit noted that while the baseball exemption may not be as broad as it once was, “Congress has made clear its intent to maintain the baseball exemption for anything related to the employment of minor league players, the reserve clause as applied to minor league players, and the relationship between major and minor league baseball.” Id. at 1243 (citing 15 U.S.C. § 26b(b)).
A review of Supreme Court precedent surrounding the baseball exemption for nearly a century underscores the power of stare decisis. As the Ninth Circuit observed, “Courts of Appeal must adhere to the controlling decisions of the Supreme Court” and “even at the Supreme Court, stare decisis is the preferred course because it promotes the evenhanded, predictable, and consistent development of legal principles, fosters reliance on judicial decisions, and contributes to the actual and perceived integrity of the judicial process.” Miranda, 860 F.3dat 1242–43 (alteration, citation, and internal quotation marks omitted). The jurisprudence also displays the importance of the separation of powers, as the Supreme Court, due in part to that doctrine, in upholding the exemption reached a result that it described as an illogical and inconsistent “aberration.”