Harrison (Buzz) Frahn
Michael R. Morey
Simpson Thacher & Bartlett LLP
On August 23, 2018, the California Court of Appeal, First District, affirmed the Superior Court of San Francisco City and County’s holding that the State Bar of California was not required to disclose individual-level data for applicants to the State Bar in response to several California Public Records Act (“CPRA”) requests seeking such data. Sander v. Superior Court, 237 Cal. Rptr. 3d 276 (Cal. Ct. App. 2018) (hereafter, the “Appellate Opinion”). The decision came after roughly ten years of litigation balancing the State Bar’s obligations to release applicant data to the public against the privacy interests of State Bar applicants. Although the Superior Court based its decision on five separate grounds, the Court of Appeal addressed only one of the grounds and found that the State Bar was not required to disclose the applicant data because it would have to create new records when disclosing the data to protect the applicants’ privacy, thus bringing the disclosure outside the scope of the CPRA. Id. at 280. On November 14, 2018, the California Supreme Court denied the appellants’ petition for review, cementing for now the State Bar’s lack of obligation to disclose individual-level applicant data under the CPRA.
Factual Background and Procedural History
In the early summer of 2008, UCLA law professor Dr. Richard Sander, former State Bar of California governor Joe Hicks, and the First Amendment Coalition (collectively, the “Petitioners”) sent CPRA requests to the State Bar of California seeking “individual-level” law school and bar admission data for all applicants to the State Bar from 1972 to 2008 (hereafter, the “Requests”). Sander v. The State Bar of California, No. CPF-08-508880, 2016 WL 6594874, at *2 (Cal. Super. Ct. Nov. 7, 2016) (hereafter, the “Trial Court Opinion”). The Requests specifically sought the following data for all applicants to the State Bar from 1972 to 2008: (a) “race,” (b) “law school,” (c) “whether an applicant was a ‘transfer student,’” (d) “year of law school graduation,” (e) “law school grade point average (“GPA”),” (f) “undergraduate GPA,” (g) “Law School Admission Test (“LSAT”) score,” (h) “whether the applicant passed the California bar exam,” and (i) “raw and scaled scores for each component of each California bar exam taken.” Id. The Petitioners sought this data to conduct a study on whether there was a “relationship between preferential admissions programs in higher education” and discrepancies in “bar passage rates between racial and ethnic groups.” Appellate Opinion at 280. The State Bar refused to produce the requested data and, in October 2008, the Petitioners filed a writ of mandate in the Superior Court of California for San Francisco City and County against the State Bar seeking to require the State Bar to produce the data. Trial Court Opinion at *2-3.
The Petitioners and the State Bar stipulated to conduct the litigation in two phases: (1) Phase I addressed “whether the State Bar ha[d] any legal duty to produce the requested records,” and (2) Phase II addressed “whether the provision of the requested records to Petitioners would violate the privacy of any person, and whether the cost or burden of manipulation, reproduction, or disclosure of the requested records provide[d] a basis for denying or limiting disclosure.” Id. at *3. Phase I concluded in 2013 with a decision by the California Supreme Court that, under California’s common law right of public access, there was a “sufficient public interest in the information” requested by the Petitioners that the State Bar should “provide access to it.” Appellate Opinion at 280. The California Supreme Court qualified its decision by holding that the trial court must address the following two issues before requiring the State Bar to produce the requested data: (1) whether it was possible to release the requested data in a way that did not violate the applicants’ privacy, and (2) whether there were any other interests that “outweigh[ed] the public’s interest in disclosure.” Id. at 280-81. On remand, the State Bar allowed the Petitioners’ experts to examine a subset of the requested data to determine whether it was possible to produce it in a form that would protect the State Bar applicants’ privacy. Id.
While Phase II of the litigation was still pending, the California Legislature passed Business and Professions Code section 6026.11, a provision that generally made State Bar records subject to CPRA requests. Id. However, Business and Professions Code section 6060.25—enacted at the same time as section 6026.11—exempted certain State Bar records containing data that “may identify an individual applicant” from the scope of the CPRA. Trial Court Opinion at *3-5, *7. The trial for Phase II began on July 11, 2016 in the wake of these newly enacted provisions. Id. at *4.
The Trial Court Decision
(A) Petitioners Propose Four Protocols To Protect Applicant Privacy
At trial, the Petitioners presented four different protocols that their experts determined the State Bar could use to protect the applicants’ privacy rights when the State Bar produced the data sought by the Requests. Id. at *4.
The State Bar argued that if it used the Petitioners’ proposed protocols when producing the requested data, then the State Bar would be forced to create new records, which the State Bar argued it was not required to do when responding to CPRA requests. Id. at *5-6. The State Bar also asserted that even if it followed the procedures of any one of the four protocols, significant risks remained that the produced data would individually identify the applicants, and thus violate their privacy. Id. at *4.
(B) Petitioners’ Protocols Fail To Adequately Protect Privacy And Demand More Than What The CPRA Requires
The trial court agreed that the State Bar did not have to release the requested data and based its holding on five separate grounds. Id. at *5. First, the trial court ruled that the State Bar would be forced to create new records to comply with the Petitioners’ proposed protocols to protect the applicants’ privacy, and that the CPRA does not require the creation of new records to comply with information requests. Id. Second, the trial court decided that disclosure of the requested data would violate the Business and Professions Code section 6060.25 because it could be used to re-identify the applicants. Id. at *5,*7. The trial court also found that the following three provisions of the CPRA each exempted the State Bar from disclosing the requested data: (a) Government Code Section 6254(c) which protects against disclosure of information that would be “an unwarranted invasion of personal privacy,” (b) Government Code Section 6254 (k), which prohibits releasing the information if it is barred by other federal or state law, and (c) Government Code Section 6255(a), which is a “catch-all exemption” that “balance[s] the public interest in disclosure against the public interest in non-disclosure.” Id. at *5, *7-10.
The trial court’s main focus in ruling for the State Bar was the applicants’ privacy. The trial court agreed with the State Bar and its experts that the Petitioners’ proposed protocols to protect the applicants’ privacy did not sufficiently reduce the risk of the applicants being individually identifiable. Id. at *12. The court found that, even after applying Protocols One, Two, and Four, a high percentage of unique records would still exist in the resulting datasets, which would contribute to a serious risk of individual identification. Id. at *13. The trial court was also concerned that even if an applicant could not be individually identified, the requested data still posed a risk of “attribute disclosure,” wherein “a person is able to determine that an applicant who attended a particular law school, graduated at a certain year, and is of a certain race/ethnicity must also be one of such applicants who share a certain range of law school GPA, for example.” Id. at *14. Accordingly, because of the significant risk of identification, the trial court held that disclosure would violate Business and Professions Code section 6060.25, which the trial court determined was an absolute bar against disclosure if an applicant “may” be identified from the release of their data. Id. at *7. And, although the trial court also found that Protocol Three posed less of a risk of individually identifying applicants, the court determined that Protocol Three’s proposed manner of distilling and grouping the data eliminated the disclosed data’s value. Id. at *14.
The trial court also determined that producing the requested data under the Petitioners’ proposed protocols would violate Government Code Section 6254(c)––the CPRA exemption concerned with “invasion of personal privacy.” Id. at *8. In analyzing this provision, the trial court weighed the public interest in disclosing the requested data and the applicants’ privacy interest in nondisclosure. Id. While the trial court agreed that there was a strong public interest in understanding the bar admission process and any discrepancies therein, the trial court concluded that the applicants’ privacy interest in nondisclosure was stronger because of the risk of identification and potential stigma resulting from the possibility of the data being “used to draw broad conclusions.” Id. at *8-9.
The trial court also examined how the risk of individual identification from the disclosure of the requested data would affect the State Bar’s ability to collect and release other data. Id. at *10. In examining the CPRA’s “catch-all exemption,” Government Code Section 6255(a), the trial court found that “the public interest in non-disclosure clearly outweigh[ed] the public interest” in disclosure in part because disclosure would impede the State Bar’s collection of data that was “necessary, or otherwise helpful, to the performance of its functions.” Id. The court noted that concerns about privacy would make individuals and entities reluctant to provide such data to the State Bar. Id. It also stated that allowing the Petitioners’ Requests would likely lead to other parties’ making “similar requests in the future” which would result in the release of large amounts of individual data. Id. at *11. The trial court concluded that having this much applicant data available to the public would significantly increase the risk that any “valuable, non-identifying” data that the State Bar released in the future would contribute to the ease of identifying State Bar applicants. Id.
The Petitioners appealed the trial court’s decision.
The Appellate Court Decision
The California Court of Appeals affirmed the trial court’s decision on August 23, 2018. Appellate Opinion at 279. The appellate court addressed only one of the five grounds that the trial court relied on in denying the Petitioners’ writ of mandate, and held that there was no need to reach the other grounds because one ground was sufficient. Id. at 280. The appellate court agreed with the trial court and the State Bar that the Petitioners’ proposed protocols to protect the applicants’ privacy would force the State Bar to create new records, and the CPRA does not require responding entities to create new records to respond to information requests. Id. at 286, 292.
The appellate court began its analysis of the trial court’s decision by noting that, although the goal of the CPRA is to ensure transparency between the government and the public, there is a “tension” between this goal and “the equally important public interest in protecting citizens and public servants from unwarranted exposure of private matters.” Id. at 286-87. And despite the CPRA’s presumption that disclosure should occur unless an exemption applies, the appellate court ruled that the question presented on appeal was not whether the data sought by the Petitioners fell under an applicable exemption to the CPRA, but whether the “information in the form” that the Petitioners wanted was even included under the “obligations imposed by the CPRA.” Id. at 287.
The appellate court then held that there was no obligation to create new records when responding to CPRA requests. Id. at 288. Citing to both California precedent and precedent relating to the federal Freedom of Information Act, the appellate court stated that the State Bar only had a duty to release records that already existed at the time of the request, not to create a new data file to comply with the request. Id. The appellate court noted a distinction between “searching, extracting, compiling, or redacting” already-existing data and creating new data values, which is what the Petitioners’ proposed protocols asked the State Bar to do. Id. at 289.
Petitioners made several unsuccessful arguments for why the State Bar should be compelled to produce the requested data. First, the Petitioners argued that their proposed protocols did not require creation of new data but “merely required the State Bar to redact or manipulate existing data and do some computer programming” which was within the scope of the CPRA. Id. at 290. The appellate court disagreed and found compelling the trial court’s review of the Petitioners’ four proposed protocols and reasoning for why each one of the protocols would compel the State Bar to create new records. Id. at 289-90. For example, Protocol One required the State Bar to create new coding values and recode the data to fit within these values, as well as the creation of a “physical data enclave.” Id. Protocols Two and Four required the State Bar to create new data categories and calculate new values to mask data that could individually identify applicants. Id. The appellate court agreed with the trial court that the Petitioners’ protocols did not simply require the State Bar to redact certain data––instead, the protocols required the State Bar to recode and produce new data. Id.
The Petitioners also argued that the State Bar should disclose the requested data because two provisions of the CPRA permitted public agencies to charge costs to the requestor related to “data compilation, extraction or programming” and to delay responding to the request because of “the time it takes to ‘compile data,  write programming language,’” showing that the creation of new records is contemplated within the CPRA.Id. at 290 (citing Government Code Sections 6253.9 (b)(2), 6253 (c)(4)). The appellate court disagreed and found that the provisions cited by the Petitioners did not encompass the work required by the proposed protocols to protect the applicants’ privacy if the State Bar was forced to respond to the Requests. Id. at 290-91. The appellate court noted that the Petitioners provided no examples of when an agency was forced “to undertake programming that would assign new or different values to existing data, replace groups of data with median figures or variables, and collapse and band data into newly defined categories.” Id. at 291.
The Petitioners further contended that the trial court “on its own initiative should have concocted a plan for disclosing at least some of the bar application data ‘subject to a process that entails only redaction of information, which would not require creating anything.’” Id. at 291. In particular, the Petitioners asserted that, as a public agency, the trial court itself had the burden of “prov[ing] a basis for nondisclosure of a public record.” Id. Because Petitioners had not raised the issue of only partially releasing data at the lower court level, the appellate court did not rule on this issue, but noted that “it seem[ed] odd for Petitioners to expect the trial court to succeed where their own experts in this highly technical field did not.” Id. at 291-92.
On November 14, 2018, the California Supreme Court denied the Petitioners’ petition for review of the appellate court’s decision.
Accordingly, the appellate court affirmed the denial of the Petitioners’ writ of mandate seeking to compel the State Bar to respond to their CPRA Requests after finding that the State Bar would have to create new records to comply with the Requests, which took the requested data outside the scope of the CPRA. Although the appellate court’s decision was fairly narrow––addressing only one of the five grounds relied on by the trial court––it nonetheless may have a significant impact on future CPRA requests submitted to the State Bar and the continued debate between the public’s interest in State Bar applicant data and the privacy interests of State Bar applicants.
A number of advocacy groups and individuals weighed in on both sides of this case, thus demonstrating that the debate is important to many. Several parties intervened in support of the State Bar, including the Black Women Lawyers Association of Los Angeles, Inc., the John M. Langston Bar Association of Los Angeles, and many past applicants to the California Bar. Several other entities and individuals filed amicus briefs in support of the Petitioners, including the Reporters Committee for Freedom of the Press and thirteen media organizations (American Society of News Editors, Associated Press Media Editors, Association of Alternative Newsmedia, Bay Area News Group, California News Publishers Association, Californians Aware, The Center for Investigative Reporting, Los Angeles Times Communications LLC, The McClatchy Company, MPA- The Association of Magazine Media, National Press Photographers Association, Online News Association, and Society of Professional Journalists), the Pacific Legal Foundation, the National Association of Scholars, the Electronic Frontier Foundation, and other individuals.
Robert E. Connolly
Law Office of Robert E. Connolly
In the capacitor private class action litigation, U.S. District Judge James Donato agreed to certify a class of plaintiffs led by four distribution companies that purchased capacitors from mostly Asia-based electronics companies. In re Capacitors Antitrust Litigation (No. III), ase No. 17-md-02801-JD, 2018 WL 5980139 (N.D. Cal. Nov. 14, 2018). Capacitors are found in every device that runs on electricity. A complex device such as a cell phone typically has hundreds of capacitors. This civil litigation followed the Antitrust Division’s capacitor grand jury which to date has resulted in eight corporate guilty pleas for fixing the price of electrolytic capacitors sold in the United States. There are several types of capacitors. The Direct Purchaser Plaintiffs (DPPs) alleged a single conspiracy among the defendant electrolytic capacitor manufacturers and film capacitor manufacturers.
Class certification requires the class meet four requirements under Federal Rule of Civil Procedure 23: “sufficiently numerous parties, common questions of law or fact, typicality of claims or defenses and adequacy of representation.”Id.at *2. One of the provisions of Rule 23(b) must also be met.Id. DPPs sought certification under Rule 23(b)(3): “questions of law or fact common to class members predominate over any questions affecting only individual members” and a class action is “superior to other available methods for fairly and efficiently adjudicating the controversy.” Fed R. Civ. P 23(b)(3). Under the recent Supreme Court class certification cases of Comcast Corp. v. Behrend, 569 U.S. 27 (2013) and Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338 (2011), the Court’s evaluation of plaintiffs' ability to meet these standards must be “rigorous.”
Plaintiffs’ Motion to Certify the Class
The criteria at issue in the motion before the court was defendants’ challenge to predominance. For class certification, Judge Donato noted that the DPPs did not need to prove the fact of a conspiracy to obtain class certification, but only that the issue is common to the class and “is capable of class wide resolution in one stroke.” 2018 WL at *5 (citing Wal-Mart, 564 U.S. at 350). The Court found that the record established that the existence of a conspiiracy to fix prices was amenable to class wide proof, relying on the guilty pleas already entered. Id. (“To a considerable degree the fact of a conspiracy to fix process has already been established by the criminal pleas.”) The Court also cited a core of incriminating emails and other evidence submitted by the DPPs indicating frequent meetings, exchange of prices among the defendants and other incriminating evidence. Id.
The next question, and the main area of battle between the litigants, was whether plaintiffs could prove antitrust injury/impact through class wide proof. The Court noted that the plaintiffs were required to show that the fact of injury was capable of class wide proof. But the plaintiffs were not required to show that the amount of injury was capable of class wide proof stating, “it is well established that damage calculations alone cannot defeat certification.” Id. at *3 (citing Yokoyama v. Midland Nat’l Life Ins. Co., 594 F. 3d 1087, 1094 (9th Cir. 2010)). The Court found that the plaintiffs established class wide proof of injury though two experts’ witnesses: Drs. James T. McClave and J. Douglas Zona. Dr. McClave’s study was most relevant. While the defendants disputed Dr. McClave’s conclusions, Judge Donato found they did not identify any methodological flaws sufficiently grave to bar admission of his work. The Court stated that the defendants’ objections to the studies done, particularly by Dr. James T. McClave, “may be grist for good cross-examination at trial,” but that the question was whether Dr. McClave practiced “junk science.” Id. at *6. On this score the Court found that: “The materials presented to the Court show that his work is sound and reliable, and consistent with established econometric methods. Id. The Court also noted “the prevailing view, which the Court agrees with, is that ‘price fixing affects all market participants, creating an inference of class-wide impact even when prices are individually negotiated.”’ Id. *7 (citing, In re Urethane Antitrust Litigation, 768 F. 3d 1245,12564 (10th Cir. 2014)). Judge Donato noted that there are a number of procedural tools to deal with individualized damages such as appointment a magistrate or special master.
The last issue the Court dealt with was whether it was proper to include purchasers of both electrolytic capacitors and film capacitors in a single class. The DPP’s alleged a single capacitor conspiracy including both electrolytic and film capacitors. The Court held that there was sufficient evidence to find that the question of whether there was a single conspiracy was subject to common question of law and fact because there was evidence that both types of capacitors were discussed at some meetings and some personnel of some defendants attended both types of meetings. “These are sufficient for present purposes.” Id. at *10. The Court did not address the specific arguments made by the defendants as to why film customers should be excluded from the class. All of the guilty pleas in the Antitrust Division’s capacitor investigations were specifically for fixing the price of electrolytic capacitors.” In fact, but not noted by Judge Donato, the Antitrust Division conducted two separate grand juries and shut down its investigation of film capacitors without taking any action. (The “film only” defendants have appealed on this issue.)
Based on the above, the Court found that a class action was clearly superior to individual proceedings, especially on the questions of conspiracy, impact and fact of damages. The Court noted that “any remaining individualized questions on the calculation and distribution of damages can be managed.” Id.
Defendants’ Daubert Motion to Exclude Expert Testimony
In discussing the class certification issue the Court already addressed the motion to exclude the expert testimony since the issues overlapped. Before considering the expert testimony as to whether there were common questions of fact regarding injury or impact, the Court already found that the proffered expert testimony was not “junk science.” The Court, therefore, denied the Daubert motions, except noting that Dr. Zona could not testify about his conclusion “that defendants engaged in the alleged conspiracy.” Id. at*11.
Pillsbury Winthrop Shaw Pittman LLP
On November 6, 2018, Judge Lucy H. Koh of the Northern District of California granted the FTC’s motion for partial summary judgment in its ongoing litigation against Qualcomm. FTC v. Qualcomm Inc., No. 17-CV-00220-LHK, 2018 WL 5848999, at *1 (N.D. Cal. Nov. 6, 2018). While the FTC’s suit alleges that Qualcomm has harmed competition in the modem chip market in violation of § 5 of the Federal Trade Commission Act (“FTCA”), the government successfully sought summary judgment on only the relatively narrow question of whether certain telecommunications industry agreements governing the use of standard essential patents (“SEPs”) require Qualcomm to license such patents to competing modem chip suppliers. Id. Still, the ruling is a significant win for the FTC in the overall litigation as the wrongful refusal to license its SEPs to competitors is a key component of Qualcomm’s alleged scheme to unfairly dominate the modem chip market. See id. Moreover, the FTC’s motion inspired amicus briefs on both sides, underscoring the fact that Judge Koh’s decision is likely to have implications on SEP licensing practices far broader than the instant case. See id. at *4.
Modem chips, also known as baseband processors, are key components of complete wireless devices like cell phones. Communications over such devices depend on widely distributed networks that implement cellular communications standards, like the 4G LTE family of standards. Industry groups known as standard-setting organizations (“SSOs”) develop and manage those cellular standards and commonly adopt standards that incorporate patented technology. To prevent the holders of those patents from blocking implementation of a given standard, SSOs also adopt intellectual property rights (“IPR”) policies, which require an SSO’s members to license their SEPs on terms that are fair, reasonable, and non-discriminatory (“FRAND”). Id. at *2. Qualcomm holds SEPs related to cellular standards and has relevant FRAND obligations under the IPR policies of two SSOs—the Telecommunications Industry Association (“TIA”) and the Alliance for Telecommunications Industry Solutions (“ATIS”). Id. at *3.
According to the FTC’s motion for partial summary judgment, Qualcomm’s FRAND obligations under the TIA and ATIS IPR policies require it to license its SEPs to all applicants, including competing suppliers of modem chips and other cell phone components. Id. at *7. Qualcomm’s opposition does not dispute that the IPR policies constitute binding contracts, but instead argues that these policies only require it to license its SEPs to suppliers of complete devices, like cell phones themselves, because only such complete devices actually “practice” the relevant cellular standards. Id. at *7, *14. Trade organizations representing app makers and other companies in the computer and communications industries filed an amicus brief in support of the FTC’s motion while Nokia filed an amicus brief in support of Qualcomm. Id. at *4.
The FTC’s motion did not seek to prove the government’s ultimate claim that Qualcomm has violated § 5 of the FTCA. Id. at *7. However, Qualcomm’s failure to abide by its FRAND obligations under these IPR policies is one of the three interrelated practices that the FTC does contend in its complaint collectively constitute such a violation. The other key practices, not addressed on summary judgement, are that Qualcomm (1) will not sell its modem chips unless a customer accepts a license to its SEPs for “elevated royalties,” and (2) entered into “exclusive dealing arrangements” with Apple, a particularly important manufacturer of finished cellular devices. Id. at *1.
The District Court’s Analysis
In addressing Qualcomm’s contractual obligations under the TIA and ATIS IPR policies, the District Court relied heavily on Ninth Circuit precedent addressing the scope of “a SSO IPR policy with almost identical language” and identifying “sweeping” FRAND commitments. Id. at *10–11. In those cases, the Ninth Circuit had initially recognized that SSOs ensure “not just interoperability but also lower product costs and increased price competition” and, accordingly, that “SSOs requir[e] members who hold IP rights in standard-essential patents to agree to license those patents to all comers” and that their IPR policy language “admits of no limitations as to who or how many applicants could receive a license.” Id. (quoting Microsoft Corp. v. Motorola, Inc., 696 F.3d 872, 876, 884 (9th Cir. 2012)) (emphasis added by Judge Koh). When the Microsoft case returned to the Ninth Circuit a few years later, the court reiterated that a “SEP holder cannot refuse a license to a manufacturer who commits to paying the [F]RAND rate.” Id. at *11 (quoting Microsoft Corp. v. Motorola Inc., 795 F.3d 1024, 1031 (9th Cir. 2015)) (emphasis added by Judge Koh). Seeing no room after these cases to draw the distinction between component and finished product licensing proposed by Qualcomm, the District Court instead simply concluded that the “binding precedents are clear: a SEP holder that commits to license its SEPs on FRAND terms must license those SEPs to all applicants.” Id.
Judge Koh found further support for this result in the procompetitive principles espoused by the guidelines and statements of purpose associated with the IPR policies at issue. The guidelines to the TIA IPR policy “specifically identify ‘a willingness to license all applicants except for competitors of the licensor’ as an example of discriminatory conduct” that is prohibited by the policy. Id. at *12. In addition, the “TIA IPR policy is designed to . . . ‘enable competing implementations that benefit manufacturers and ultimately consumers’” and its “FRAND commitment ‘prevents the inclusion of patented technology [in a standard] from resulting in a patent holder securing a monopoly in any market as a result of the standardization process.’” Id. (emphasis added by Judge Koh). The District Court reasoned that absent an obligation to license its SEPs to competing component suppliers, an SEP holder like Qualcomm could effectively monopolize the modem chip market by embedding its technology into a cellular standard and then refusing to license others to sell modem chips. Id.
The court also found that Qualcomm’s proposed distinction between components and finished products was belied by its own words and deeds. While Qualcomm argued that the general “industry practice” is to license SEPs only to handset manufacturers, Qualcomm itself had received “extensive” SEP licenses to produce components such as modem chips. Id. at *12–13. Further, in prior litigation where Ericsson had alleged that Qualcomm’s modem chips infringed Ericsson’s SEPs, Qualcomm argued that the very same TIA IPR policy at issue here required Ericsson to license its SEPs to Qualcomm. Id. at *13. Similarly, although amicus Nokia argued that “the FTC’s interpretations of Qualcomm’s commitments under the TIA and ATIS IPR policies are ‘novel and very surprising,’” Nokia itself had previously alleged in a European Commission filing that Qualcomm’s termination of a modem chip license agreement breached its “unequivocal” FRAND duties pursuant to multiple IPR policies. Id.
Finally, the court found that Qualcomm’s basic premise that only finished devices “practice” or “implement” standards made little sense. Judge Koh explained that any “SEP is by definition necessary to practice or for the purpose of implementing a standard . . . . Thus, if a modem chip infringes a SEP, practice or implementation of the relevant standard would require a license to that SEP.” Id. at *14.
While the District Court’s grant of partial summary judgment is generally limited to a contractual analysis of the relevant IPR policies, it puts the FTC one step closer to proving its overall theory of a § 5 violation and provides significant momentum for the government leading up to the start of trial on January 4, 2019. Further, beyond the bounds of this case, Judge Koh’s ruling may inspire component manufacturers in various standard-dependent industries to begin demanding SEP licenses from their competitors.
Lesley E. Weaver
Matthew S. Weiler
Bleichmar Fonti & Auld LLP
Background and Summary
Iowa Public Employees’ Ret. System v. Merrill Lynch, et al., Case No. 17-cv-6221, 2018 WL 4636993 *1-*3 (S.D.N.Y. Sept. 27, 2018) (“Iowa Public Employees’”) is a class action brought by plaintiff investors who paid borrowing fees in connection with securities lending services financial firms who are the leading providers of securities lending services (the “Prime Broker Defendants”) as part of stock loan transactions. The investors allege that defendants conspired to boycott trading platforms AQS, SL-x, and Data Explorers, new market entrants whose competing technology threatened Prime Broker Defendants by offering more direct and transparent trading. Id. at *1-*3.
The Iowa Public Employees’ opinion is notable because the case analyzed horizontal conduct among competitors under Section 1 of the Sherman Act that included suppression of technology and information and applied the per se standard to Defendants’ activities. The case is also important because it shows that the suppression of a more efficient technology can constitute an antitrust injury where it is alleged that in the absence of collusion there would be more transparent markets for products with lower costs for market participants.
In Iowa Public Employees’ the investors alleged that alternative technologies from three new entrants promised users a variety of new tools promoting transparency and price-comparison in the stock loan market. EquiLend, the market leader, provided the incumbent technology, which did not “offer fully electronic, price-transparent trading capabilities or the ability to negotiate terms with multiple potential counterparties simultaneously, nor [did] it offer central clearing to market end users.” Id. At *5. The Prime Broker Defendants occupied a majority of board seats in EquiLend, and were alleged to control its business decisions. The investors alleged the Prime Broker Defendants exercised their board control to boycott the competitors by starving them of data and liquidity.
Defendants jointly moved to dismiss the investors’ complaint, arguing that their conduct was not per se unlawful because most of it was conducted through a single entity which was a joint venture with legitimate objectives. Defendants also argued that the investors had not pled antitrust injury because their allegations concerning the rival trading technologies were too speculative and remote. Defendants contended aspects of the alternative technologies made them unsuitable as substitutes to the Defendants’ trading services.
Judge Failla rejected Defendants’ arguments and denied their motion to dismiss.
The Per Se Standard Applies to Actions Taken by Competitors to Suppress Competing Technology
Judge Failla reviewed the investors’ allegations under both a per se and “rule of reason” standard in determining whether the allegations amounted to an unreasonable restraint of trade under Section 1 of the Sherman Act. Iowa Public Employees’, 2018 WL 4636993 at *12. Only manifestly anticompetitive conduct is appropriate for per se analysis. The “rule of reason” is a relatively deferential level of review that requires courts to weigh “‘all of the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition,’ including factors such as the relevant business and the history, nature, and effect of the restraint.” Id. (quoting Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 885 (2007).The per se rule, in contrast, applies to “agreements or practices which because of their pernicious effect on competition and lack of any redeeming virtue are conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use.” N. Pac. R. Co. v. United States, 356 U.S. 1, 5 (1958).
Defendants argued for “rule of reason” analysis because the actions were taken in the context of a joint venture since most of the allegations concern Defendants’ actions taken on behalf of EquiLend. Iowa Public Employees’, 2018 WL 4636993 at *23.
Judge Failla agreed with the investors, finding that the per se analysis was proper. Id. The Court’s opinion rests on its conclusion that “the Prime Broker Defendants are direct competitors in the stock loan market.” Iowa Public Employees’, 2018 WL 4636993 at *24. Judge Failla noted that Defendants did not act as a joint venture but as “separate economic actors pursuing separate economic interests.” Id. (quoting Am. Needle, Inc. v. Nat'l Football League, 560 U.S. 183, 195). Thus, Judge Failla relied on the economic reality of the Defendants’ association overall—that they directly competed for stock lending services—rather than the legal formality of their joint venture relationship. This was true even if in many respects Defendants’ EquiLend joint venture was “consistent with” the lawful objective of providing securities lending technology. Id. It was important to this analysis that Defendants acted outside of EquiLend’s rational best interests in certain respects, such as turning down a profitable takeover bid from SL-x, and also that EquiLend acquired both SL-x and AQS and made no use of their valuable competing technology. Id. at *6.
The Court also observed that EquiLend operated as a vehicle to further collusive activities, providing a place for six of the Prime Brokers to coordinate their efforts to undermine challenging technology, including acquiring and destroying a competitive threat. In this sense, the joint venture was conducted to pursue anticompetitive ends: Defendants “acting as separate and individual economic decision makers, conspired to boycott SL-x, Data Explorers, and also AQS, and that this conduct was undertaken on behalf of each prime Broker Defendant, and not in furtherance of a legitimate joint venture.” Id. at *24. Although the joint venture offered legitimate services, these acted as a “smokescreen” for collusion. Id.
Suppression of Securities Trading Technology is an Antitrust Injury
Defendants also argued that the investors lacked antitrust standing. “To confer antitrust standing, an alleged injury must be ‘of the type the antitrust laws were intended to prevent and [an injury] that flows from that which makes defendants’ acts unlawful” and that the investors are an “efficient enforcer” of the antitrust laws. Id. at * 26 (quoting Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489 (1977)). In determining, “efficient enforcer” status courts consider the following four factors, “[1)] direct or indirectness of the injury [2)] the existence of an identifiable class of persons whose self-interest would normally motivate them to vindicate the public interest in antitrust enforcement; [3)] the speculativeness of the alleged injury and [4)] the difficulty of identifying damages and apportioning them among direct and indirect victims so as to avoid duplicative recoveries.” Gatt Commc’ns, Inc. v. PMC Assocs., L.L.C., 711 F.3d 68, 78 (2d Cir. 2013). When reviewing these factors, courts apply a balancing test that will vary with the particular circumstances of the case.
The investors alleged that Defendants’ collusion caused “the lack of a central marketplace of stock loan transactions,” which was an antitrust injury because it “(i) creates bottlenecks, (ii) wastes resources, and (iii) causes volatile, opaque, and artificially inflated prices.” Id. at *27. It was not disputed that this is the type of harm the antitrust laws are designed to prevent.
Defendants countered, however, that aspects of the alternative trading technology made the investors’ injuries speculative. Under the speculativeness factor, courts deny standing to bring an antitrust claim only where it is “entirely uncertain . . . that absent the scheme, the necessary infrastructural preconditions for [the alleged lost benefit] . . . would have developed.” Iowa Public Employees’, 2018 WL 4636993 at 28 (quoting In re IRS, 261 F.Supp. 430, 494 (S.D.N.Y. 2017) (internal citations omitted)). Even where the alleged injury “veers closer to speculative than prudence would advise, it would not eliminate Plaintiffs’ standing” to bring an antitrust claim. Id. at *27.
Defendants argued that the investors’ injury was too remote because an “all-to-all” trading platform, offering all the aspects of securities lending that exist in incumbent platforms, was not possible with the technology that had been suppressed. Id. at *27. Defendants argued that Data Explorers and SL-x had no plans to offer trading platforms in the United States and that AQS lacked the ability to enable “all-to-all” trading due to rules requiring broker-dealer intermediaries. The investors countered with specific allegations showing that the Data Explorers and SL-x offered a variety of technologies that enhance borrowers’ and lenders’ insight and would have increased efficiency and transparency in the market. Id. at *28. Further, the investors pointed out that AQS was well equipped to deal with broker rules and that AQS would have reduced lending risk and provided centralization via clearing brokers. Id.
The Court found that the investors had sufficiently alleged that the suppressed technology would have provided tangible benefits to trading, including increased transparency and efficiency. The Court concluded that, “Plaintiffs have plausibly alleged that the new market entrants were met with market demand, and would have provided benefits, including increased transparency and efficiency leading to lower prices, had the conspiracy not occurred.” Id. at *28.
Finally, Defendant argued that the providers of the alternative technology were direct victims of the conspiracy and thus the investors were not “efficient enforcers” of the antitrust laws. In their response, the investors argued that these companies’ decision not to sue had no bearing on their standing as both “direct purchasers” and “consumers” of the financial product. Id.
The Iowa Public Employees’ decision is important because it shows that the per se standard can apply to agreements reached among competitors even if the agreements are not explicitly related to prices. The decision also shows that, at the pleading stage, antitrust injury can be caused by allegations that due to suppression of technology markets are less efficient and transparent, even if certain aspects of the suppressed technology did not have the same operability as the incumbent technology.
Elizabeth T. Castillo
Cotchett, Pitre & McCarthy, LLP
On November 13, 2018, the district court in Yi v. SK Bakeries LLC et al., No. 3:18-cv-05627 (W.D. Wash.) denied Defendants Cinnabon Franchisor SPV LLC (“Cinnabon”) and SK Bakeries, LLC (“SK”)’s motions to dismiss a complaint alleging Defendants violated the Sherman Act, 15 U.S.C. 1, et. seq., and Washington’s Unfair Business Practices Act, RCW 19.86, et seq., by entering into a franchise agreement that included a no-hire and non-solicitation provision until July 12, 2018. See Order Denying Defendants’ Motion to Dismiss, No. 3:18-cv-05627 (ECF No. 33), Nov. 13 2018 (W.D. Wash.) (“Order”). Plaintiff, a former SK employee, filed the putative class action complaint claiming the provision required a franchisee to agree that it would “not employ or seek to employ an employee of [Cinnabon], of another franchisee, or attempt to induce such employee to cease his/her employment without prior written consent of such employee’s employer.” Order at 2. Plaintiff contends this provision was in Cinnabon’s franchise agreement with SK and in Cinnabon’s franchise agreements with other franchisees. Order at 3. Plaintiff argued the agreement prevented franchises from hiring workers from other Cinnabon franchises, thereby eliminating wage competition that could increase salaries and benefits. Id.
In an opinion by United States District Judge Robert J. Bryan, the court found that the complaint sufficiently alleged an agreement, conspiracy, or combination between two or more entities capable of violating the Sherman Act. Order at 5. The allegations reflect that the franchisor and franchisees’ agreement joins separate decision makers in direct competition for employees such that “the agreement deprives the marketplace of independent centers of decisionmaking” pursuant to Am. Needle, Inc. v. Nat’l Football League, 560 U.S. 183, 195 (2010) (“American Needle”). Order at 6. Even if Cinnabon and its franchisees, including SK, are considered a single firm, and actions of a single firm are considered independent actions and do not violate Sherman Act, “[a]greements made within a firm can constitute concerted action covered by § 1 when the parties to the agreement act on interests separate from those of the firm itself” under American Needle. Order at 6 (citing Am. Needle, 560 U.S. at 200).
The court did not find the two cases to which Defendants cited in support of their motions to dismiss persuasive. Order at 6-7. The court remarked it was premature to dismiss the complaint based on Williams v. I.B. Fischer Nevada, which held that a franchisor and franchisee were a single entity that could not violate the Sherman Act, because “[w]hether corporate entities are sufficiently independent requires an examination of the particular facts of each case.” Order at 6-7 (citing Williams v. I.B. Fischer Nevada, 999 F.2d 445, 447-48 (1993) (“Williams”)). The court likewise stated Danforth & Assoc., Inc. v. Coldwell Banker Real Estate, LLC, an unpublished case which cites Williams without analysis for the same proposition, was not binding and is of questionable application at the motion to dismiss stage. Order at 7 (citing Danforth & Assoc., Inc. v. Coldwell Banker Real Estate, LLC, 2011 WL 338798 (W.D. Wash. Feb. 3, 2011)).
After the court decided that defendants were capable of conspiring under the Sherman Act, the court turned to whether the restraint of trade was unreasonable and therefore illegal. While Restraints can be unreasonable per se because they “always or almost always tend to restrict competition and decrease output” or restraints can be unreasonable under the rule of reason, which requires courts to “conduct a fact-specific assessment of market power and market structure . . . to assess the restraint’s actual effect on competition.” Order at 7 (citing Ohio v. Am. Express Co., 138 S. Ct. 2274, 2283-84 (2018)). Defendants argued that the alleged restraint at issue is a vertical restraint that requires a full rule of reason analysis. Order at 8. Plaintiff contended that the restraint at issue is a horizonal restraint that warrants a per se analysis or a quick look rule of reason analysis (see infra). Id. The court found the restraint was both vertical (the franchisee agrees not to solicit or hire a Cinnabon employee) and horizontal (the franchisee agrees not to solicit or hire another franchisee’s employee without permission). Order at 9.
The court stated that Plaintiff failed to allege a per se violation of the Sherman Act because “‘it is not clear that the Defendants’ agreements ‘lack any redeeming virtue.’” Order at 9. The court noted a truncated rule of reason or “quick look” antitrust analysis was appropriate at this stage because “an observer with even a rudimentary understanding of economics could conclude that the arrangements in question would have an anticompetitive effect on customers and markets.” Order at 7-8 (citing California ex rel. Harris v. Safeway, Inc., 651 F.3d 1118, 1138 (9th Cir. 2011) (“Harris”). Plaintiff alleges an arrangement between competing firms to not compete with each other in the market for employees, such that someone with a basic understanding of economics would understand would have an anticompetitive effect on the prevailing wage. Order at 10. The court found Plaintiff met her initial burden of showing Defendants’ agreement restrained trade unreasonably under the quick look rule of reason analysis. Id. at 11. The court remarked that this case is similar to another case where the plaintiff asserted a Sherman Act claim based on a provision in the franchise agreement under which franchisees agreed not to hire employees of other McDonald’s stores. Order at 10-11 (citing Deslandes v. McDonald’s USA, LLC, 2018 WL 3105955 (N.D. Ill. June 25, 2018)). There, the court deemed the per se analysis was inappropriate but stated that the plaintiff plausibly stated a claim for relief under the quick look analysis. Order at 10.
Thus, while the court rejected Defendants’ motions to dismiss, it did so based on the quick look rule of reason analysis and not the more lenient per se standard. Plaintiff must prove that Defendants’ anticompetitive effects outweighed their procompetitive benefits and justifications under the quick look rule of reason standard. Order at 8 (citing Harris, 651 F.3d at 1134). The court noted that Plaintiff failed to allege sufficient facts to support a full rule of reason analysis at this time and warned that she does so at her own risk and those she seeks to represent if she is unable to prevail under a quick look rule of reason analysis.
Jamie R. Rich and Sarah E. Barrows
Greenberg Traurig, LLP
Jan. 1, 2020, marks the effective date of the recently enacted California Consumer Privacy Act (CCPA), a new law that requires companies to comply with numerous requirements related to collecting and processing personal information of California consumers, employees, and other individuals. Under the CCPA, the definition of “consumer” can easily include California employees who are residents.
Which Employers Must Comply with CCPA?
With some exceptions, employers must comply with CCPA if they receive personal information from California residents (including employees) and if their business – or its subsidiary or parent company – meets at least one of the following criteria:
Calculating Annual Revenues in Excess of $25 Million. It remains unclear whether annual revenue figures are derived from global revenues or only California revenues – the CCPA does not specify. However, this ambiguity may be addressed by amendments expected in 2019 when the California State Legislature reconvenes after the new year.
Determining if a Business Obtains or Sells the Personal Information of 50,000 California Consumers. The CCPA defines personal information as “any information that . . . relates to . . . a particular consumer or household” and specifically includes professional or employment-related information. Under the CCPA, employees’ performance reviews, compensation information, and many if not all HR records are likely to constitute “personal information,” and non-employee California consumers (as defined under CCPA) will also likely count towards the 50,000 tipping point that mandates compliance.
Calculating 50 Percent of “Sales” of California Consumers’ Personal Information. The CCPA also broadly defines “selling” or “sales” as obtaining monetary or other valuable consideration for “selling, renting, releasing, disclosing, disseminating, making available, transferring, or otherwise communicating orally, in writing, or by electronic or other means, a consumer’s personal information by the business to another business or a third party[.]” Valuable consideration could include promotions or other marketing activities undertaken in exchange for disclosure of a consumer’s personal information.
What Actions Must Employers Take?
If an employer is subject to the CCPA, its employees (and other consumers) will have numerous rights under the CCPA that will likely require employers to deploy internal and external processes and data handling practices, including, but not limited to, updating employee privacy policies or notices, creating or revising data maps and/or data inventories, revising contracts with service providers, and making designated methods available for employees (and other consumers) who submit data access requests.
What Are Employees’ Rights Under the CCPA?
Under the CCPA, employees are consumers, and their rights include the following:
What Potential Liability Could Employers Face for Failing to Comply with CCPA?
California employees may institute a civil action under CCPA, even if there is no harm, if a business violates its duty to implement and maintain reasonable security procedures, and if certain types of non-encrypted or non-redacted personal information is subject to unauthorized access or disclosure as result.
Statutory damages in independent civil actions or class actions involving data theft or other data security breaches range between $100 to $750 per California employee per incident, or actual damages, whichever is greater. The California AG may choose to bring a civil action for CCPA violations. Intentional violations are subject to penalties of up to $7,500 per violation. Unintentional violations that are not cured within 30 days of notice are liable for up to $2,500 per violation.
The California State Legislature is expected to consider changes to the law when it reconvenes in January 2019.