Winston & Strawn LLP
On June 14, 2018, in a unanimous opinion reversing the Second Circuit, the United States Supreme Court held that U.S. courts are not required to give conclusive effect to a foreign government’s proffered statement of its own law. Animal Sci. Prod., Inc. v. Hebei Welcome Pharm. Co., 138 S. Ct. 1865, 1869 (2018).The opinion resolved a circuit split on the import of views offered by a foreign government on the meaning of its law that emerged after the adoption in 1966 of Federal Rule of Civil Procedure 44.1, which made the meaning of foreign law a legal question on which courts could “consider any relevant material or source.” While the opinion prescribes “respectful consideration” of a foreign government’s statement, the Supreme Court ultimately held that U.S. district courts are not bound to give conclusive weight to a foreign government entity’s interpretation of its law.
In the underlying multidistrict litigation in the Eastern District of New York, U.S.-based purchasers of vitamin C brought claims against Chinese manufacturers and exporters for fixing the price and quantity of exports of the vitamin in violation of the Sherman and Clayton Acts.Id. at 1870.Defendant manufacturers twice sought and were denied dismissal, first with a motion to dismiss, and again at summary judgment, arguing principles of international comity, including the act of state and foreign sovereign compulsion doctrines, shielded their conduct because Chinese law mandated the challenged pricing regime.See 584 F.Supp.2d 546 (denying Defendants’ motion to dismiss); 810 F.Supp.2d 522 (denying Defendants’ motion for summary judgment).
In support of Defendants’ argument that they acted pursuant to Chinese regulations governing vitamin C export pricing, the Ministry of Commerce of the People's Republic of China submitted a brief as amicus curiae, asserting that the Ministry is the highest administrative authority regulating foreign trade in China, and that the Chinese law did, in fact, require Defendants to fix the vitamin C prices at issue.138 S. Ct. at 1870.The Chinese manufacturers also presented expert testimony to further bolster their position that the Ministry’s “interpretation of its own regulations and policies carries decisive weight under Chinese law.”Id.
However, the District Court declined to give the Ministry’s statement conclusive effect, and credited evidence Plaintiffs offered in response, including expert testimony and a Chinese statement to the World Trade Organization in 2002 that it no longer engaged in “export administration of vitamin C,” to deny summary judgment and hold that Chinese law did not require Defendants to fix the price or quantity of vitamin C exports. 810 F.Supp.2d at 525, 532.At trial, the jury found Defendants liable, and Plaintiffs were awarded approximately $147 million in damages and an injunction against further anticompetitive behavior.138 S. Ct. at 1871.
The Second Circuit reversed on appeal, holding that the district court improperly denied Defendants’ motion to dismiss.In re Vitamin C Antitrust Litigation, 837 F.3d 175, 195 (2d. Cir. 2016).The Court of Appeals explained that “because the Chinese Government filed a formal statement in the district court,” that statement was “conclusive” as to the meaning of Chinese law and “principles of international comity required the district court to abstain from exercising jurisdiction.” Id. at 179.In support of its holding, the Second Circuit relied on the “seminal” Supreme Court case, United States v. Pink, 315 U.S. 203, decided in 1942, which held that U.S. courts are “bound to defer to” a foreign government’s statement of its law.Id. at 188.While acknowledging a Circuit split on this question and differing views on the enduring validity of Pink following the 1966 enactment of Federal Rule of Civil Procedure 44.1, which allows a U.S. district court to “consider any relevant material or source” in determining foreign law, the Second Circuit “found no support” for the argument that Rule 44.1 undermined the mandate of Pink.Id. at 187; See e.g., United States v. McNab, 331 F.3d 1228, 1239-42 (11th Cir. 2003) (noting Honduran government’s shift in interpretation of its law and accepting its previous position as the proper interpretation); McKesson HBOC Inc. v. Islamic Republic of Iran, 271 F.3d 1101, 1108-09 (D.C. Cir. 2001), vacated in part on other grounds, 320 F.2d 280 (D.C. Cir. 2003) (declining to adopt meaning of Iranian law advanced by Iranian government because of conflicting expert affidavits).
The Supreme Court Decision
The Supreme Court granted certiorari to address the Circuit split and reversed, in a unanimous opinion, holding that the Second Circuit’s “unyielding” rule requiring complete deference to any “facially reasonable” foreign government submission was inconsistent with Federal Rule of Civil Procedure 44.1’s directive to “consider any relevant material.” Animal Sci. Prod., Inc. at 1874.The Court observed that Rule 44.1 was intended to “make the process of determining alien law identical with the method of ascertaining domestic law to the extent” possible, and analogized the potential different sources for interpretations of foreign law to different sources of state law interpretation, contrasting the “binding” impact of a decision by the highest court of a state, with the “respectful consideration” given to the views of a state’s attorney general. Id at 1873-74.The Ministry’s submission was akin to the latter, not the former.
Further, while noting that Pink was decided before Rule 44.1 existed, the Court distinguished that case on its facts, describing the Pink circumstances as “unusual.”Id. at 1874. In keeping with its concern about the source of the foreign government statement, the Court emphasized that in Pink, the United States obtained the Soviet Government Commissariat for Justice’s official declaration through “diplomatic channels,” and that the Commissariat for Justice was determined to “have the power to interpret existing Russian law.”Id. at 1874 (citing Pink at 220). Those distinctions justified giving conclusive weight to the declaration in Pink, but such deference was not warranted in this case.
Due to the “many and diverse legal systems” and “range of circumstances in which a foreign government’s views may be presented,” the Court held “no single formula or rule will fit all cases.”Id. at 1873.The Court enumerated five factors that judges should consider when determining how much weight to accord a foreign government’s statement:
(1) the statement’s clarity, thoroughness, and support,
(2) context and purpose,
(3) transparency of the foreign legal system,
(4) role and authority of the entity or official offering the statement, and
(5) the statement’s consistency with the foreign government’s past positions.
Id. at 1873-1874.Taking no position on the correct interpretation of Chinese law, but deeming the materials considered by the district court “relevant,” the Court vacated the Second Circuit’s opinion and remanded for renewed consideration.Id. at 1875.
Although this opinion resolves the Circuit split on this matter, the five-factor test the Court adopted gives district court judges a considerable amount of discretion in interpreting foreign law, even in the face of a foreign government’s representation in a U.S. court of its laws meaning, and might create more uncertainty than it settles. In particular, the Court’s decision leaves district court judges with little guidance on the potentially subjective questions of the transparency of a foreign legal system (factor three), and the role and authority of the entity or official offering a legal interpretation (factor four). This places district courts in a position to parse the positions and credibility of foreign authorities, which could make foreign entities more reluctant to weigh in on disputes.
One likely result of the Supreme Court’s decision is increased reliance on foreign-law experts, including in opposition to or to bolster a foreign government entity’s legal statement, or to opine on the factors of transparency and the authority of foreign government entities. Litigants will need to develop a comprehensive and convincing position on the meaning of foreign law, including through expert testimony, which can withstand the adversarial process.
Jonathan LevinePritzker Levine LLP
In a victory for digital privacy advocates, on June 22, 2018, the United States Supreme Court held that individuals maintain legitimate expectations of privacy, for Fourth Amendment purposes, in their cell-site location information (CSLI) maintained by cell phone companies and that the government generally may not collect CSLI from cell phone companies without a warrant. Carpenter v. United States, __ U.S. __ (2018), 2018 WL 3073916.In a 5-4 opinion authored by Chief Justice Roberts, the Supreme Court held that even though CSLI data is maintained by the cell phone companies, the third party doctrine – which provides that information about an individual held by third parties falls outside the protections of the Fourth Amendment – does not apply to CSLI “in light of the deeply revealing nature of CSLI, its depth, breadth, and comprehensive reach, and the inescapable and automatic nature of its collection.”2018 WL 3073916 at *15.
In 2012, Timothy Carpenter was arrested and charged with six counts of armed robbery for robbing stores in multiple locations in Michigan and Ohio. Carpenter’s arrest was based, in part, on CSLI data obtained by the government without a warrant under the Stored Communications Act from Carpenter’s two cell phone providers. The government had obtained 127 days of CSLI data from MetroPCS and two days of CSLI data from Sprint, which collectively showed 12,898 location points cataloging Carpenter’s movements, an average of 101 data points per day.2018 WL 3073916 at *4. The CSLI data showed that Carpenter (or at least his cell phone) was near four of the charged robberies at the time those robberies occurred. Id. at *5.Carpenter moved to suppress the CSLI data, arguing that the government had no right under the Fourth Amendment to obtain that data without a warrant supported by probable cause. Carpenter’s motion to suppress was denied by the District Court and Carpenter was subsequently convicted on all of the armed robbery counts, based in part on the CSLI data linking his cell phone to the locations of four of the robberies.Id.
On appeal, the Sixth Circuit affirmed Carpenter’s conviction, holding that Carpenter lacked a reasonable expectation of privacy in the CSLI data collected by the government because he had voluntarily shared that information with MetroPCS and Sprint. United States v. Carpenter, 819 F.3d 880 (2016). Relying on the Supreme Court’s third party disclosure cases, including Smith v. Maryland, 442 U.S. 735 (1979), the Sixth Circuit held that the CSLI data for Carpenter’s cell phone was not entitled to Fourth Amendment protection because Carpenter had voluntarily provided that data to MetroPCS and Sprint as a means of using his cell phone. Carpenter, 819 F.3d at 888.
The Supreme Court Reverses in a 5-4 Opinion
On June 22, 2018, the Supreme Court reversed the decision by the Sixth Circuit, holding that Carpenter’s CSLI data was entitled to Fourth Amendment protection even though it was maintained by MetroPCS and Sprint. The majority opinion was authored by Chief Justice Roberts, who was joined by Justices Ginsburg, Breyer, Sotomayor and Kagan. Justices Kennedy, Thomas, Alito and Gorsuch each filed a separate dissenting opinion. The majority and dissenting opinions are discussed below.
Chief Justice Robert’s Majority Opinion
Chief Justice Roberts begins by noting that the development of technology has forced the Court to find ways to preserve privacy from the government even when surveillance tools have enhanced the government’s ability to “encroach on areas normally guarded from inquisitive eyes.”2018 WL 3073916 at *6.He cites to several recent Court decisions, including Riley v. California, 573 U.S. __ (2014) and Kyllo v. United States, 533 U.S. 27 (2001), as examples of ways in which changes in technology have required the Court to take a more nuanced approach to Fourth Amendment cases. Addressing the facts in Carpenter, Chief Justice Roberts concludes that CSLI data does not fit under existing precedents and that it instead lies at the “intersection of two lines of cases,” the first addressing geolocation and the second addressing the Court’s third-party doctrine.
With respect to the Court’s geolocation decisions, Chief Justice Roberts acknowledges that in some of its decisions predating the digital era, such as United States v. Knotts, 460 U.S. 276 (1983),the Court had ruled that a driver should not expect his movements on public roads to be kept private. But, times have changed, says Chief Justice Roberts, and people would not expect the government to track their every movement over long periods of time without obtaining a warrant to do so. Chief Justice Roberts notes that because people carry their cell phones virtually everywhere with them, CSLI data provides the government with “near perfect surveillance, as if it had attached an ankle monitor to the phone’s user,” not only going forward, but also back in time as many as five years. 2018 WL 3073916 at *10.
Turning to the Court’s third-party doctrine cases, Chief Justice Roberts declines to extend the third-party doctrine to CSLI data, even though that data is always owned and controlled by the cell phone companies. He highlights the potential privacy impact of CSLI data, noting that “cell phone location information is detailed, encyclopedic, and effortlessly compiled.”2018 WL 3073916 at *10.Chief Justice Roberts distinguishes the Court’s earlier third party doctrine cases, including United States v. Miller, 425 U.S. 435 (1976) and Smith v. Maryland, 442 U.S. 735 (1979), noting that when those cases were decided, the Court was dealing with relatively limited types of personal information and that no one at the time could have imagined that cell phones would be so common and would provide so much information about their users for so long. He goes on to note that because cell phones are such a pervasive part of life, carrying one is necessary for participation in modern society. In this light, a cell phone user cannot be said to be voluntarily sharing information about his or her location with the cell phone company, which was the underlying rationale for the third party doctrine.
Chief Justice Roberts leaves the door open for the government to obtain CSLI data without a warrant in two circumstances. First, Chief Justice Roberts suggests that if the government seeks CSLI data for a short time period (fewer than seven days is mentioned in the opinion), then this might not constitute a Fourth Amendment search for which a warrant would be needed.2018 WL 3073916 at *9, fn 3. Second, the majority opinion would also make exceptions for emergencies, such as bomb threats, active shootings and child abductions.Id. at *15.
The Four Dissenting Opinions
Justice Kennedy, in a dissent joined by Justices Alito and Thomas, argues that CSLI data is not fundamentally different from other business records maintained by third parties and therefore there is no need for the Court to treat CSLI data any differently under the third-party doctrine. According to Justice Kennedy, no search within the meaning of the Fourth Amendment occurred because Carpenter should have had no expectation of privacy in CSLI data that he neither owned nor controlled. Justice Kennedy goes on to criticize the majority opinion for concluding that CSLI data somehow implicates greater privacy interests than the financial records and telephone records that the Court previously had held to be obtainable by the government without a warrant under the third party doctrine set forth in United States v. Miller, 425 U.S. 435 (1976) and Smith v. Maryland, 442 U.S. 735 (1979).2018 WL 3073916 at *16-29.
Justice Alito, in a dissent joined by Justice Thomas, echoes Justice Kennedy’s arguments and goes on to criticize the majority for a ruling that he predicts will likely lead to one of two undesirable outcomes. Either the majority opinion will, in future cases, be applied broadly to encompass all kinds of documents and data containing personal information (further eroding the third party doctrine), or subsequent cases will force the Court to qualify and limit its ruling in ways that have not yet been discovered, creating a “crazy quilt of the Fourth Amendment.”2018 WL 3073916 at *42-55.
Justice Thomas, having already joined the Kennedy and Alito dissents, also separately dissents to urge the Court to reconsider its use of the “reasonable expectation of privacy” test first enunciated by the Court in Katz v. United States, 389 U.S. 347 (1967), for Fourth Amendment cases. According to Justice Thomas, the reasonable expectation of privacy test set forth in Katz has no basis in the text or history of the Fourth Amendment and is unworkable in practice.2018 WL 3073916 at *30-41
Finally, Justice Gorsuch dissents to argue that the Court should not only abandon its use of the reasonable expectation of privacy test set forth in Katz, as advocated by Justice Thomas, but also abandon the third party doctrine in its entirety, rather than limit it as the majority opinion does. Justice Gorsuch would instead focus instead on whether an individual has a property interest in the records at issue.2018 WL 3073916 at *56-68.
Implications for the Future
While Chief Justice Roberts states that the Court’s decision is narrow and limited to the specific facts of the case before it (2018 WL 3073916 at *13), the decision is likely to have broad impact in future cases. As some commentators already have noted, there is no reason why the holding in Carpenter would not be equally applicable to a wide range of databases maintained by third parties containing sensitive and intimate information about millions of individuals. See, e.g., The Broad Reach of Carpenter v. United States, Paul Ohm, https://www.justsecurity.org/58520/broad-reach-carpenter-v-united-states/.Justice Gorsuch’s dissent, read with the majority opinion, also raises the question whether the third-party doctrine will ultimately survive at all in the digital age.
Hanson Yu, Legal InternFederal Trade Commission
On June 3, 2018 California Governor Jerry Brown signed the California Consumer Privacy Act of 2018 (“CPA”). The CPA, which takes effect in January 2020, will give consumers unprecedented control over data that businesses gather on them and imposes significant penalties on businesses that do not comply. The CPA will force companies to establish new protocols that comply with the law’s requirements. Many of the provisions are new to the United States but appear to mirror the EU’s General Data Protection Regulation (GDPR), which went into effect earlier this year.
The CPA will expand consumer data protections across the board. The CPA, which adds sections 1798.100 to 1798.198 to California’s code, operates by broadening the scope of current protections in two important ways. First, the CPA defines “consumer” as a “California resident.” This means that non-consumer groups like students, tenants, employees etc. will now count as consumers under the new law. Second, the CPA also expands the definition of personal information to include data indirectly related to individuals, i.e., information like internet history, annual household energy usage, and shopping habits.
Four Requirements that will Change the Privacy Game
The Act spells out four new requirements that businesses must follow regarding the collection and sale of personal information. First, businesses that collect or sell consumer data must disclose:
Once businesses collect a consumer’s data, they cannot use the information for an unrelated purpose without first notifying the consumer. Businesses are exempt from the disclosure requirement if they collected the data for a one-time transaction and do not otherwise intend to use, sell, or retain it.
Second, California residents may request that businesses delete their personal data. Exceptions include data that is necessary for the business to:
Third, consumers must have the option of opting out of having their personal data resold to third parties. Stricter requirements apply to minors: children under the age of 16 must expressly opt-in, and children under the age of 13 need parental consent to opt-in. The CPA also forbids businesses from refusing to provide goods and services to individuals who opt-out. Businesses are free to charge different prices or provide tiered services to individuals based on their chosen privacy preferences.
Fourth, businesses may offer financial incentives to entice consumers to provide personal data, but they must:
Consumers may authorize other consumers (including companies, activists, and other associations) to exercise opt-out rights on their behalf.
Non-Compliance Comes with a Hefty Price Tag
The changes will also affect entities that had previously escaped privacy laws—namely small businesses. The CPA will apply to all businesses that satisfy any one of three requirements:
This means that even relatively small businesses may find themselves caught in the headwinds because simple day-to-day business operations, e.g., maintaining a website, can quickly accrue large amounts of consumer data. For example, most websites passively capture individual IP addresses, which count as personal information.
Careless businesses may quickly find themselves paying substantial fines:
David M. GoldsteinFarmer Brownstein Jaeger & Goldstein LLP
In a “gig economy” decision that will please employers but disappoint independent contractors, the Ninth Circuit reversed a district court’s dismissal of a Sherman Act Section 1 challenge to Seattle’s ordinance authorizing a collective-bargaining process for independent contractors who work as for-hire drivers for “driver coordinators” such as Uber and Lyft. The Ninth Circuit held that the state-action immunity doctrine did not exempt the ordinance from preemption by the Sherman Act, because the State of Washington has not affirmatively expressed a state policy authorizing private parties to price-fix the fees that for-hire drivers pay in exchange for ride referral services from driver coordinators. The court similarly held that the active-supervision requirement for state-action immunity was not met. However, the court affirmed the district court’s dismissal of preemption claims under the National Labor Relations Act. The court remanded the case for further proceedings. U.S. Chamber of Commerce v. City of Seattle, No. 17-35640, Opinion (9th Cir. May 11, 2018).
On December 14, 2015, Seattle enacted Ordinance 124968, an Ordinance Relating to Taxicab, Transportation Network Company, and For-Hire Vehicle Drivers (Ordinance).The purpose of the Ordinance is to “’allow taxicab, transportation network company, and for-hire vehicle drivers (‘for-hire drivers’) to modify specific agreements collectively with the entities that hire, direct, arrange, or manage their work,’ in order to ‘better ensure that [for-hire drivers] can perform their services in a safe, reliable, stable, cost-effective, and economically viable manner.’” Id. at 9 (quoting Ordinance).
The Ordinance requires “driver coordinators,” such as Uber and Lyft, to bargain collectively with for-hire drivers. A “driver coordinator” is defined as “‘an entity that hires, contracts with, or partners with for-hire drivers for the purpose of assisting them with, or facilitating them in, providing for-hire services to the public.’”Id. at 9-10 (quoting Ordinance).The Ordinance establishes an election procedure for a “qualified driver representative” (QDR).If a QDR is selected, the city notifies the driver coordinator, which must give the QDR contact information about its “qualifying drivers.” If a majority of the drivers consent to representation by the QDR, the QDR is certified as the “exclusive driver representative” (EDR) for all for-hire drivers for that driver coordinator. At that point, “the driver coordinator and the EDR shall meet and negotiate in good faith certain subjects to be specified in rules or regulations promulgated by the Director including, but not limited to, . . . the nature and amount of payments to be made by, or withheld from, the driver coordinator to or by the drivers; . . . “Id. at 11 (quoting Ordinance) (emphasis added).
If an agreement is reached, it is submitted for review for compliance with the Ordinance and other regulations. The agreement becomes final and binding on all parties if the agreement is found to be compliant.If the agreement is noncompliant, it is sent back to the parties for revision. If an agreement is not reached, the matter may be submitted to an interest arbitrator who proposes an agreement for a duration for no more than two years. The proposed agreement is reviewed in the same manner as the original agreement proposed by the parties.Id. at 12-13.
The Ordinance took effect on January 22, 2016.The Chamber sued seeking a declaration that the Ordinance in unenforceable and a preliminary injunction blocking it. The Chamber asserted the Ordinance violates and is preempted by federal antitrust laws, and also is preempted by federal labor laws. Before ruling on the City’s motion to dismiss, the district court granted the Chamber’s motion for a preliminary injunction. Subsequently, the district court granted the City’s motion to dismiss, concluding that the state-action immunity doctrine exempted the Ordinance from preemption by the Sherman Act, and that the Ordinance was not preempted by the NLRA. On September 8, 2017, the Ninth Circuit granted the Chamber’s emergency motion and enjoined enforcement of the Ordinance pending the appeal.
I. State-Action Immunity
The Ninth Circuit held that the Ordinance does not meet the requirements for state-action immunity to apply.
The court first explained that “the Ordinance may be preempted facially by federal antitrust law if it authorizes a per se violation of section 1 of the Sherman Act, but not if it must be analyzed under the rule of reason.” Id. at 17.Since the City did not contest that the collective negotiations could constitute a per se antitrust violation unless state-action immunity applied, the court accepted the proposition the collective negotiations would constitute a per se offense but said the parties may address on remand whether the per se rule or the rule of reason applies.
B. Requirements for State-Action Immunity
The Ninth Circuit, citing FTC v. Phoebe Putney Health System, Inc., 568 U.S. 216 (2013), reviewed the familiar standards for state-action immunity dating back to Parker v. Brown, 317 U.S. 341 (1943), and explained that “[s]tate action immunity is the exception rather than the rule,” the Supreme Court has stressed that it is “disfavored,” and that it comes under greater scrutiny when a non-state actor invokes it.Id. at 19.The court then turned to the Supreme Court’s Midcal test used to determine whether anticompetitive acts of private parties are entitled to immunity:“First, ‘the challenged restraint [must] be one clearly articulated and affirmatively expressed as state policy,’ and second, ‘the policy [must] be actively supervised by the State.’” Id. at 20 (quoting Cal. Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc., 445 U.S. 97, 105 (1980)).For a municipality like Seattle to enjoy state-action immunity, the activities must be undertaken pursuant to a “’clearly articulated and affirmatively expressed’ state policy to displace competition.”Id.
i. The Clear-Articulation Test
The court ruled that the Ordinance failed the first prong of the Midcal test because the State of Washington has not “clearly articulated and affirmatively expressed” a state policy authorizing for hire-drivers to price-fix the fees they pay for ride-referral services provided by companies like Uber and Lyft.
The court explained that the issue under the clear-articulation test is “whether the regulatory structure which has been adopted by the state has specifically authorized the conduct alleged to violate the Sherman Act.”Id. at 21 (citations omitted) (emphasis added in decision).The relevant statutory provisions must “‘plainly show’ that the [state] legislature contemplated the sort of activity that is challenged,” which occurs where they “confer ‘express authority to take action that foreseeably will result in anticompetitive effects.’” Id. at 21 (citations omitted).The state “must ‘clearly intend to displace competition in a particular field with a regulatory structure . . . in the relevant market.’”Id. (citations omitted).
The court, after examining the relevant statutes, concluded that they did not “plainly show” that the Washington legislature “contemplated” allowing for-hire drivers to price-fix their compensation, and such an anticompetitive result was not foreseeable.Id. at 22.
In explaining the constraints the Supreme Court has placed on trying to make the “clear articulation test” more flexible, the Ninth Circuit emphasized that “it is not our role to make policy judgments properly left to the Washington state legislature. Instead, we must tread carefully in the area of state-action immunity, lest ‘a broad interpretation of the doctrine . . . inadvertently extend immunity to anticompetitive activity which the states did not intend to sanction,’ or ‘a broad application of the doctrine . . . impede states’ freedom by threatening to hold them accountable for private activity they do not condone ‘whenever they enter the realm of economic regulation.’”Id. at 31 (citation omitted). Accordingly, the court held the clear-articulation requirement for state-action immunity was not satisfied. Id.
ii. The Active-Supervision Requirement
The court next held that the Ordinance did not meet the “active-supervision” requirement for state-action immunity.
The court started with the Supreme Court’s recent explanation, in North Carolina State Board of Dental Examiners v. FTC, that “[t]he active supervision requirement demands . . . ‘that state officials have and exercise power to review particular anticompetitive acts of private parties and disapprove those that fail to accord with state policy.’” Id. at 32 (quoting, 135 S. Ct. 1101, 1112 (2015)).“[W]here, as here, ‘state or municipal regulation by a private party is involved, . . . active state supervision must be shown, even where a clearly articulated state policy exists.’”Id. (citations omitted).The court concluded that the active-state supervision requirement was not met because it was “undisputed that the State of Washington plays no role in supervising or enforcing the terms of the City’s Ordinance.” Id. at 34.The court rejected the City’s argument that “State” supervision includes supervision by municipalities, such as the City, when private actors are involved. To the contrary, “[t]he Supreme Court has stated repeatedly that active supervision must be ‘by the State itself.’” Id. at 35 (citing Midcal, 445 U.S. at 105).“[W]e hold that in this case, in which private actors exercise substantial discretion in setting the terms of municipal regulation, ‘active state supervision must be shown.’ . . . Because the distinction between states and municipalities is of crucial importance for purposes of state-action immunity, we reject the City’s invitation to treat the two entities interchangeably.”Id. at 36-37 (citations omitted).The court ruled that the Ordinance did not satisfy the active-supervision requirement.
II. The Ordinance Is Not Preempted by the NLRA
The court next held that the Ordinance is not preempted by the NLRA under either Machinists or Garmon preemption.
Machinists preemption “forbids both the National Labor Relations Board (NLRB) and States to regulate conduct that Congress intended ‘be unregulated because left “to be controlled by the free play of economic forces.”’”Id. at 37 (citations omitted) (quoting, Lodge 76, International Ass’n of Machinists & Aerospace Workers v. Wisconsin Employment Relations Commission, 427 U.S. 132, 140 (1976)).The Chamber argued that the Ordinance is preempted under Machinists because Congress chose to exclude independent contractors from the NLRA’s definition of “employee,” implicitly preempting local labor regulation of independent contractors. Id. at 38.But the court concluded that “[n]either case law nor legislative history supports the Chamber’s argument that Congress’s choice to exclude supervisors from the definition of ‘employee’ in § 152(3), on its own, has implicit preemptive effect” as to local regulation of independent contractors. Id. at 45.Accordingly, the court rejected the Chamber’s Machinists preemption argument.
“Garmon pre-emption forbids States to ‘regulate activity that the NLRA protects, prohibits, or arguably protects or prohibits.’”Id. at 38 (citations omitted) (San Diego Building Trades Council v. Garmon, 359 U.S. 236 (1959)).The Chamber argued that Garmon preempts the Ordinance “because the Ordinance ‘requires local officials and state courts to decide whether for-hire drivers are employees under the NLRA,’ a determination the Chamber contended is within the exclusive jurisdiction of the NLRB.” Id. at 46.The court rejected this argument because (1) the Ordinance expressly disclaims any such determination, and (2) the Chamber did not make “any showing or set forth any evidence showing that the for-hire drivers covered by the Ordinance are arguably employees subject to the NLRA.”Id. at 48.Thus, the court held that the Ordinance is not preempted under the Chamber’s theory of Garmon preemption.
The Ninth Circuit’s decision is important not only in the context of the “driver coordinator” industry, but more generally in any industry that relies heavily on independent contractors. It underscores that collective price negotiations by independent contractors may constitute a per se violation of the antitrust laws, and also makes clear that municipal regulations authorizing collective negotiations by private actors will not, standing alone, enjoy state-action immunity. Of course, as is so often the case, the last word has yet to be heard: on May 17, 2018, the Ninth Circuit granted Seattle’s motion to extend for 31 days the deadline for filing its petition for rehearing or rehearing en banc.
Lydia Parnes and Edward HolmanWilson Sonsini LLP
On June 6, 2018, the U.S. Court of Appeals for the Eleventh Circuit issued its decision in LabMD, Inc. v. FTC, No. 16-16270 (11th Cir. June 6, 2018), a closely watched case in which LabMD challenged the Federal Trade Commission’s authority to regulate the data security practices of private companies. The Eleventh Circuit declined to decide that issue, instead finding that the FTC’s order requiring LabMD to implement certain data security reforms was unenforceable because it lacked specificity. The court’s decision may nevertheless impact many of the FTC’s consent orders—even those not having to do with data security.
The facts surrounding the FTC’s litigation history with LabMD are long and complex. See ALJ Initial Decision at 15-44, In the Matter of LabMD, Inc.; Opinion of the Commission at 2-8, In the Matter of LabMD, Inc.; LabMD, Inc. v. FTC, No. 16-16270, slip op. at 2-9 (11th Cir. June 6, 2018). The FTC filed an administrative complaint against LabMD in 2013 following an extensive investigation into the company’s data security practices. FTC Complaint, In the Matter of LabMD, Inc. The investigation and complaint were precipitated by the alleged improper installation of LimeWire, a peer-to-peer file-sharing application, on a computer used by LabMD’s billing manager sometime in 2005. This eventually resulted in the acquisition of a company file containing the personal information of 9,300 consumers (known as the “1718 File” because of its length) by a data security company, Tiversa, in 2008. LabMD, slip op. at 3. Tiversa offered to sell security remediation services to LabMD, but was rebuffed, and then shared the 1718 File with the FTC. Id. at 3-4. The FTC’s complaint alleged that LabMD had engaged in unfair acts or practices in violation of Section 5 of the FTC Act because it had failed to employ reasonable and appropriate measures to prevent unauthorized access to personal information. FTC Complaint at 5.
The FTC’s case was first decided in 2015 by an administrative law judge (ALJ), who dismissed the complaint following an administrative trial, holding that FTC staff had not proven that LabMD’s conduct caused, or was likely to cause, substantial consumer injury, and thus could not be declared “unfair” under Section 5. ALJ Initial Decision at 92. The decision was then appealed to the full commission, which vacated the ALJ’s decision. In its opinion, the FTC held that the “substantial injury” requirement for unfairness under Section 5 was met because (1) the unauthorized disclosure of the 1718 File itself caused intangible privacy harm and (2) the unauthorized exposure of the 1718 File for more than 11 months on LimeWire created a high likelihood of a large harm to consumers. Opinion of the Commission at 25. The FTC issued a final cease and desist order “requiring that LabMD notify affected individuals, establish a comprehensive information security program, and obtain assessments regarding its implementation of the program.” Id. at 37. LabMD then petitioned the Eleventh Circuit to review the FTC’s decision and stay enforcement of the cease and desist order pending review, which the court granted in 2016. LabMD, Inc. v. FTC, 678 F. App'x 816 (11th Cir. 2016).
The Eleventh Circuit’s Decision
The key questions at issue before the Eleventh Circuit were whether (1) LabMD’s conduct and the exposure of the 1718 File actually caused or was likely to cause any injury to consumers sufficient to meet Section 5’s unfairness standard and (2) whether the commission’s cease and desist order was enforceable. Many observers were expecting the Eleventh Circuit to substantively address the first question; instead, the court assumed “arguendo” that the commission was correct in its determination that LabMD’s failure to design and maintain a reasonable data security program constituted an unfair act or practice. The court instead based its decision to vacate the cease and desist order solely on its view that the order is not sufficiently specific to be enforceable. To support its reasoning, the court walked through the FTC’s options for bringing claims against unfair acts or practices either administratively (as was done for LabMD) or in federal district court (as was done in the FTC’s case against Wyndham, see FTC v. Wyndham Worldwide Corp., 10 F. Supp. 3d 602 (D.N.J. 2014), aff'd, 799 F. 3d 236 (3rd Cir. 2015)), and then evaluated the commission’s options for proceeding against a party that violates an order arising from either action. Specifically, the court found that whether a district court is evaluating an FTC complaint for violation of an administrative cease and desist order, or a contempt motion for an injunctive order, the specificity of the order “is crucial to both modes of enforcement.” LabMD, slip op. at 25. Thus, the court held that “the prohibitions contained in cease and desist orders and injunctions must be specific. Otherwise, they may be unenforceable.” Id. at 27.
In applying this specificity requirement to the FTC’s cease and desist order against LabMD, the court found that, rather than containing any commands that the company stop committing any specific act or practice, the order “commands LabMD to overhaul and replace its data-security program to meet an indeterminable standard of reasonableness. This command is unenforceable.” Id. To elaborate on this holding, the court walked through a hypothetical example where the FTC brings an action against LabMD for failing to implement a particular safeguard and therefore failing to implement a “reasonably designed” information security program. In its example, the court found that, given that the order “is devoid of any meaningful standard informing the court of what constitutes a ‘reasonably designed’ data-security program,” it had to conclude that the FTC cannot prove LabMD’s violation by clear and convincing evidence. Id. at 28-29. To hold otherwise, the court found, would effectively and improperly modify the order via a show cause hearing, which may then be repeated over and over through future enforcement actions. “The practical effect of repeatedly modifying the injunction at show cause hearings,” the court reasoned, “is that the district court is put in the position of managing LabMD’s business in accordance with the Commission’s wishes,” and that this type of “micromanaging is beyond the scope of court oversight contemplated by injunction law.” Id. at 30. The court therefore held that the commission’s order must be vacated because it is effectively unenforceable.
Where the FTC goes from here remains to be seen. The commission could potentially seek an en banc review by the Eleventh Circuit or appeal the decision to the U.S. Supreme Court. If the Eleventh Circuit decision stands, it could have downstream effects on the FTC’s remedial powers more generally. Specifically, the broad requirement to implement a comprehensive information security program contained in the LabMD order has become a common fixture of FTC data security settlements ever since the commission imposed the first such requirement in its agreement and consent order with Eli Lilly in 2002. Since then, the FTC has also included similarly worded requirements to implement comprehensive privacy programs in its privacy consent orders, such as the FTC’s settlement with Facebook in 2012.
Reid Gaa, Summer AssociateCotchett, Pitre & McCarthy, LLP
On June 4, 2018, the U.S. Court of Appeals for the Ninth Circuit affirmed the U.S. District Court for the Northern District of California’s dismissal of a class action brought by a consumer against the chocolate manufacturer Mars, Inc. (“Mars”). Reviewing the case de novo, the Ninth Circuit concluded that the plaintiff failed to state a claim under California consumer protection laws, holding, “[i]n the absence of any affirmative misrepresentations . . . manufacturers do not have a duty to disclose the labor practices [by which a product is produced] . . . because they are not physical defects that affect the central function of chocolate products.” Hodson v. Mars, Inc., 891 F.3d 857, 860 (9th Cir. 2018).
Addressing the alleged duty to disclose at the core of plaintiff’s California consumer protection law claims, Judge A. Wallace Tashima attempted to reconcile Collins v. eMachines, Inc., 202 Cal. App. 4th 249 (2011) and Rutledge v. Hewlett-Packard Co., 238 Cal. App. 4th 1164 (2015)—two recent California Courts of Appeals cases—with the Ninth Circuit’s holding in Wilson v. Hewlett-Packard Co., 668 F.3d 1136 (9th Cir. 2012). Declining to reexamine the court’s precedent in Wilson, Circuit Judge Tashima applied plaintiff’s proposed state court tests and dismissed the case. In so doing, the Ninth Circuit clarified when a duty to disclose exists pursuant to California consumer protection laws.
Relying on a pure omission theory of consumer fraud, the class action alleged that Mars violated the Consumers Legal Remedies Act (“CLRA”), Unfair Competition Law (“UCL”), and False Advertising Law (“FAL”) by failing to disclose on its labels that its supply chains may include child and slave labor. Hodson, 891 F.3d at 861. Accordingly, the Ninth Circuit first addressed the duty to disclose under California consumer protection laws before turning to the individual claims.
The court confronted two recent interpretations of the duty to disclose from the California Courts of Appeal, which conflicted with the Ninth Circuit’s precedent in Wilson. The plaintiff advocating for the court to deviate from its precedent in Wilson, argued that Collins and Rutledge rendered the Ninth Circuit’s interpretation of California law incorrect. Hodson, 891 F.3d at 860. Without reexamining Wilson, the Ninth Circuit applied the tests set out in Collins and Rutledge, concluding that the plaintiff failed to state a claim under either test. Id. at 862.
In interpreting Collins, the Ninth Circuit determined that a manufacturer only has a duty to disclose physical defects that relate to a product’s central function and arise during the warranty period. Id. Thus, the duty to disclose did not encompass the means by which a product is produced. Id. The Ninth Circuit next turned to Rutledge, stating that while the reasoning in the case was far from clear, it could stand for one of three propositions: 1) there is a duty to disclose in light of affirmative misrepresentations; 2) there is a duty to disclose defects that go to the central function of the product; or 3) there is a duty to disclose defects that go to the central function of the product and which arise during the warranty period. Id. at 863.
Noting that Collins and Rutledge were vague as to the exact test for determining when a defendant has a duty to disclose, the Ninth Circuit ultimately concluded that the cases sanction a UCL omission claim when: 1) the plaintiff alleges the omission was material, 2) the plaintiff pleads that the defect was central to the product’s function, and 3) the plaintiff alleges circumstances that constitute actionable fraud, as identified in LiMandri v. Judkins, 52 Cal. App. 4th 326 (1997). Hodson, 891 F.3d at 863. Operating under this framework, the Ninth Circuit determined the plaintiff was required to allege that the existence of slave or child labor in the supply chain relates to the central functionality of Mars’ chocolate products but failed to do so. Id. at 864. As a result, the court concluded that the plaintiff failed to establish that Mars had a duty to disclose the child and slave labor in its supply chain. Id.
Having resolved whether Mars possessed a duty to disclose, the Ninth Circuit next addressed the plaintiff’s individual claims. Under the CLRA, the plaintiff alleged Mars misrepresented the source, characteristics, and standard of its chocolate products by omitting information about labor practices on its label. Id. at 865. However, the Ninth Circuit concluded Mars did not violate the CLRA because it was under no obligation to disclose these details about its supply chain. Id.
Next, the Ninth Circuit addressed the plaintiff’s UCL claims. Under the UCL, the plaintiff alleged Mars’ omissions violated the UCL’s prohibition on any “unlawful, unfair, or fraudulent business act or practice.” Id. The court disposed of the claims predicated on the unlawful and fraudulent prongs of the UCL by relying on the earlier conclusion Mars had no duty to disclose its labor practices on the label of its chocolate. Id.
Following this, the court turned to the plaintiff’s claim under the unfairness prong of the UCL, noting the definition of “unfair” was currently in flux among California courts. Id. at 866. The Ninth Circuit first applied the test found in Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co., 20 Cal. 4th 163 (1999) (“Cel-Tech Test”), which defines “unfair” conduct as that which threatens an incipient violation of an antitrust law, violates the spirit or policy of one of those laws, or otherwise significantly threatens or harms competition. Cel-Tech, 83 Cal. Rptr.2d at 187. Cel-Tech further requires that any finding of unfairness to competitors be “tethered to some legislatively declared policy or proof of some actual or threatened impact on competition.” Id. at 186-87. In finding the plaintiff could not state a claim under the Cel-Tech test, the Ninth Circuit rejected the plaintiff’s contention that his claims were tethered to the “legislative policies” forbidding slavery and the worst forms of child labor passed by the United Nations and the International Labor Organization. Hodson, 891 F.3d at 867. Specifically, the court reasoned there was not a close enough nexus between these policies and the failure to place disclosures on consumer labels. Id.
The court next applied the test in South Bay Chevrolet v. General Motors Acceptance Corp., 72 Cal. App. 4th 861 (1999) (“South Bay Test”), which defined unfair conduct as occurring “when [a] practice offends an established public policy or when the practice is immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers. South Bay, 72 Cal. App. 4th at 886. The Ninth Circuit reasoned that Mars’ failure to disclose its labor practices was not substantially injurious, immoral, or unethical, because it did not have a duty to do so. Hodson, 891 F.3d at 867. The court then rejected the plaintiff’s final attempt to bring Mars’ actions within the scope of the South Bay Test, stating that participation in an immoral activity would not suffice when the challenge is against the failure to disclose. Id.
Lastly, the Ninth Circuit concluded that the plaintiff could not state a claim under the FAL because the misleading nature of an advertisement is determined by whether a reasonable consumer would likely be deceived. Id. 867-68. Again relying on the absence of a duty to disclose, the court reasoned that “a failure to disclose a fact one has no affirmative duty to disclose is [not] likely to deceive anyone.” Id. at 868.
Although the Ninth Circuit declined to directly reexamine its holding in Wilson, the court acknowledged that Collins and Rutledge did not deprive Wilson of precedential value. Id. at 864. Instead, the court declared that the California Courts of Appeal decisions show “that Wilson’s safety hazard pleading requirement is not necessary in all omission cases” and “the requirement may remain applicable in some circumstances.” Id.
The court further clarified by explaining that “where the challenged omission does not concern a central functional defect, the plaintiff may still have to plead a safety hazard to establish that the defendant had a duty to disclose.” Hodson, 891 F.3d at 864. In dicta, the Ninth Circuit then offered an example of such situation, suggesting Wilson could still apply where the defect in question creates a safety hazard but is not an aspect of the central functionality of the product. Id.
Furthermore, the court delineated the kind of disclosures required by California consumer protection laws, declaring that manufacturers are not obligated to label goods as possibly being produced by child or slave labor if they do not affect the central function of the product. Id. at 860. In doing so, the Ninth Circuit emphasized that such disclosures are related to physical defects that affect the central function of a product. Id. As a result, the Ninth Circuit preserved the precedent it set in Wilson, while clarifying the pleading requirement for consumer fraud claims relying on a pure omission theory.
Harrison (Buzz) Frahn, Alexander S. MoserSimpson Thacher & Bartlett LLP
On April 13, 2018, Judge William H. Orrick of the Northern District of California issued a foreign anti-suit injunction in Huawei Techs., Co. v. Samsung Elecs. Co. blocking Chinese technology company Huawei Technologies, Co. (“Huawei”) from enforcing an injunction issued by the Intermediate People’s Court of Shenzhen (“Shenzhen Court”) that would have forced Samsung Electronics Co., Ltd. (“Samsung”) to shut down many of its operations in China.The suit before the Shenzhen Court is part of a multi-front war between Huawei and Samsung over licensing terms for patents essential to the 3G UMTS and 4G LTE wireless standards. The Shenzhen Court found Samsung infringed two of Huawei’s patents and enjoined Samsung’s Chinese affiliates from manufacturing or selling 4G LTE smartphones in China (“Shenzhen Injunction”). Samsung requested the Northern District block enforcement of the Shenzhen Injunction, arguing injunctive relief is inappropriate for alleged infringement of standard essential patents, and that such relief would frustrate U.S. public policies against anticompetitive conduct and breach of contract. Huawei responded by asserting an anti-suit injunction would offend comity, and arguing Samsung was estopped from seeking the anti-suit injunction, as doing so was directly contrary to a position it took earlier in the case.Judge Orrick ultimately sided with Samsung, issuing the anti-suit injunction to ensure settlement pressure did not prevent him from evaluating the propriety of injunctive relief for the parties’ standard essential patents.
Samsung and Huawei both own patents that are declared standard essential patents (“SEPs”) for the 3G UMTS and 4G LTE standards.Both parties agreed to license their SEPs on fair, reasonable, and non-discriminatory (“FRAND”) terms and conditions, under the Intellectual Property Rights Policy promulgated by the European Telecommunications Standards Institute (the “ETSI”). Organizations that establish standards for technologies to be used across an industry, like 4G LTE, often request that the owners of patented technologies adopted in a given standard agree to license those patents on FRAND terms. If a patent owner will not agree, the patented technology may not be included in the standard. The purpose of FRAND terms is to balance patent holders’ private interests against the public interest in technological standards—they curb the potential for anticompetitive conduct that standards would otherwise create.
Samsung and Huawei both committed to licensing their SEPs on FRAND terms, but despite a course of negotiations going back to 2011, they have been unable to reach a cross-license agreement for their respective patent profiles. The instant suit is one result of that failed course of negotiations.
On May 24, 2016, Huawei filed this lawsuit alleging that Samsung infringed eleven of Huawei’s SEPs, and breached “its commitment to enter into a SEP cross-license with [Huawei] on FRAND terms and conditions.” Huawei also filed eleven separate actions in China for patent infringement, largely for the Chinese counterparts of the SEPs asserted in this case. While the court repeatedly refers to these actions as filed a day after the domestic action, Huawei asserts that, because of the time difference, the domestic and Chinese actions were filed simultaneously.
On January 11, 2018, the Shenzhen Court held Samsung is infringing two of Huawei’s Chinese SEPs and issued the Shenzhen Injunction, which bars Samsung’s Chinese affiliates from manufacturing or selling 4G LTE phones in China. Samsung filed a notice of appeal, and on February 1, 2018 moved in the N.D. Cal. case for an anti-suit injunction, arguing the Shenzhen Injunction will force it to close factories in China and negotiate with Huawei at a disadvantage.
The court’s April 13 order is of interest to antitrust practitioners because it helps clarify the standard applied in the Ninth Circuit to motions for anti-suit injunctions and addresses several issues surrounding the anticompetitive implications of SEPs.
The Standard for Foreign Anti-Suit Injunctions
The Ninth Circuit established a three-part test for determining the propriety of a foreign anti-suit injunction in E. & J. Gallo Winery v. Andina Licores S.A., 446 F.3d 984, 989 (9th Cir. 2006). That test directs courts to (1) determine whether the parties and issues are the same in the domestic and foreign actions, and whether the former is dispositive of the latter, (2) determine whether any of certain equitable factors apply, and (3) assess the injunction’s impact on comity.
The parties disputed whether Gallo replaces or supplements the traditional requirements for a preliminary injunction, most recently modified in Winter v. NRDC, Inc., 555 U.S. 7 (2008). Judge Orrick reviewed two Ninth Circuit opinions in foreign anti-suit injunction cases where only the Gallo test was discussed and a Third Circuit case where the Gallo test was adopted as an explicit replacement for the Winter factors. Based on these, Judge Orrick concluded that only the Gallo test need be applied.
Identity of the Parties and Issues
The first part of the Gallo test is a functional determination of whether the parties and issues in the two suits are the same, and whether the first action is dispositive of the action to be enjoined. Additionally, when the parties in the actions are the same, “the two questions of whether ‘the issues are the same’ and whether ‘the domestic action is dispositive of the foreign action’ collapse into one.” Microsoft Corp. v. Motorola, Inc., 871 F. Supp. 2d 1089, 1098 (W.D. Wash. 2012) (“Microsoft I”).
Here, Samsung and Huawei agreed that the parties in the two actions are functionally the same, but disputed whether the issues were. Relying on Microsoft I and Microsoft Corp. v. Motorola, Inc., 696 F.3d 872, 875 (9th Cir. 2012) (“Microsoft II”), Samsung argued that the primary issue in both cases is the propriety of injunctive relief for infringement of Huawei’s SEPs. Microsoft was a breach of contract case where Microsoft alleged it was a third-party beneficiary of Motorola’s contractual commitment to offer its SEPs for the H.264 video standard on FRAND terms. There the district court held, and the Ninth Circuit agreed, that the domestic case would resolve the patent infringement claims Motorola brought in Germany because the European patents at issue there were subject to the same FRAND licensing obligations.
Here, Huawei alleged Samsung breached its contractual obligations to license its SEPs on FRAND terms, and asked that Samsung be barred from obtaining injunctive relief on those SEPs. Samsung argued that this would resolve whether such injunctions are appropriate for alleged infringement of SEPs generally, making the domestic case dispositive of the foreign case, as it was in Microsoft. Huawei responded by attempting to distinguish the Microsoft cases.It argued, inter alia, that the German action in Microsoft was filed months after the domestic action as an attempt to circumvent an unfavorable outcome in the domestic case, and that the German court never reached the FRAND issue. In contrast, Huawei claimed it filed the domestic and Chinese actions simultaneously, and that the Shenzhen Court explicitly decided the FRAND issues.
Judge Orrick brushed Huawei’s distinctions aside as “irrelevant” in the same sentence that he called them “undeniable and important.” He found that neither party disputed the other’s status as a third-party beneficiary of its contract with the ETSI to offer SEPs on FRAND terms, and so the “‘contractual umbrella over the patent claims’ controls” and the “availability of injunctive relief . . . depends on the breach of contract claims.”
Huawei also argued Samsung should be judicially estopped from claiming it is entitled to an anti-suit injunction because Samsung previously argued an appropriate FRAND rate could only be set after the court decided the validity, enforceability, infringement and essentiality of the SEPs. In other words, Samsung previously argued that the breach of contract issues were dependent on the patent issues, and now argues the exact opposite.Judge Orrick was not swayed from his decision that the breach of contract claims in the domestic case are dispositive, but Samsung did not escape unscathed. Following Samsung’s previous arguments to their logical conclusion, Judge Orrick concluded, would prevent him from ever reaching the FRAND issues at all. Consequently, he held that while Samsung was not estopped from seeking an anti-suit injunction, it is estopped from later arguing “that the breach of contract claims depend on evidence not before me, such as the validity, infringement and essentiality of foreign patents.”
The Unterweser Factors
The court then turned to the second part of the Gallo test, the equitable considerations that may justify relief. These are known as the Unterweser factors, and support an anti-suit injunction “when [the foreign suit] would (1) frustrate a policy of the forum issuing the injunction; (2) be vexatious or oppressive; (3) threaten the issuing courts in rem or quasi in rem jurisdiction; or (4) where the proceedings prejudice other equitable considerations.” The court focused on the first and second of these, concluding that the foreign suit would frustrate domestic policy, but could not be called vexatious or oppressive.
The parties argued over whether the Shenzhen Injunction would frustrate “domestic policies against injunctive relief on SEPs and general public policies against anticompetitive conduct and breaches of contract.” Judge Orrick noted that “the bulk of precedent” supported Samsung’s position.But he identified a different policy at issue: “this court’s ability to determine the propriety of injunctive relief in the first instance.” According to Judge Orrick, the Shenzhen Injunction undermined this policy in two ways.First, it created the risk of inconsistent judgments, as the domestic case could find injunctive relief is inappropriate for Huawei’s SEPs.Second, because implementation of the Shenzhen Injunction would force Samsung to close factories in China, it “would likely force [Samsung] to accept Huawei’s licensing terms, before any court has an opportunity to adjudicate the parties’ breach of contract claims” (which were not before the Shenzhen Court).Thus, an anti-suit injunction was necessary to ensure the court can reach the question of whether injunctions are appropriate for SEPs.
In contrast, the court declined to find the Chinese suits were vexatious or oppressive, despite a clear statement from a Vice President at Huawei that the company sought the injunction to use “as a bargaining chip,” rather than to actually “kick Samsung out of China.” Judge Orrick relied primarily on Huawei’s near-simultaneous filing of the actions to distinguish Microsoft I, where Motorola’s cases were filed months apart, and the German action was considered vexatious.
Comity, the final part of the Gallo test, is “the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation.” Gallo requires the court “estimate whether any  interference [with comity] is so great as to be intolerable.” Here, Judge Orrick’s unwillingness to acknowledge the “simultaneous” filing of the domestic and Chinese actions bore fruit.He wrote that “[s]ince this action preceded the Chinese actions—if only by one day—enjoining the foreign action would not ‘intolerably impact comity.’” Judge Orrick also noted that the anti-suit injunction’s scope is limited, as the domestic case is scheduled for trial in December of 2018, and the Shenzhen Court’s injunction cannot become final until Samsung’s appeal of that court’s decision is resolved.
With the issuance of the foreign anti-suit injunction, and given the parties’ nearly seven year history of fruitless negotiation, it seems likely this case will continue on to trial in December 2018. In the meantime, the court’s decision shows that even if a party seeks to avoid any appearance of forum shopping when pursuing claims in multiple jurisdictions, it should still carefully consider where it files suit first.It also shows that contractual obligations to license SEPs on FRAND terms are likely to dominate concerns over actual infringement or validity. This is in part because the opposite arrangement would make it more difficult for courts to set FRAND rates, thereby limiting the utility of FRAND agreements as a tool for combating the anticompetitive use of SEPs.