Harrison (Buzz) Frahn
In October 2016, two of brewing’s biggest names headlined a $107 billion merger, attracting the attention of the DOJ and zythophiles, aka beer lovers, alike. By the time the merger cleared DOJ review, Anheuser-Busch InBev SA/NV (“ABI”) had combined with SABMiller, plc (“SAB”), divesting SAB’s U.S.-based interest in the process. See DeHoog v. Anheuser-Busch InBev SA/NV, 899 F.3d 758, 761–62 (9th Cir. 2018).
A “bevy of beer aficionados” challenged the acquisition under Section 7 of the Clayton Act, arguing, inter alia, that the merger would reduce competition, raise prices, diminish product diversity, and suppress smaller companies. Id. at 760, 762. In an August 8th decision, the Ninth Circuit affirmed the trial court’s dismissal of these claims, finding that the consumers failed to successfully allege a change in market concentration.
ABI and SAB both produce well-known and well-distributed brands. ABI manufactures brands such as Budweiser, Bud Light, and Stella Artois, while SAB was involved in the production of Coors Light and Miller Lite. ABI’s roughly 46% share of the market makes it “the largest producer and seller of beer in the United States.” Id. at 761. SAB held a similarly significant share of the market: SAB operated with Molson Coors Brewing Company (“Molson”) to form MillerCoors, LLC (“MillerCoors”), a company whose 25% market share made it “the second-largest producer and seller of beer in the United States.” Id.
The companies announced their merger in November 2015, and, after review, the DOJ settled with ABI in July 2016, allowing the acquisition to proceed. Id. The agreement required SAB to divest its U.S. business, resulting in an SAB owned by ABI and a MillerCoors fully owned by Molson. Id. The same day, the DOJ’s Antitrust Division filed a civil suit to block the transaction for violating the Clayton Act but subsequently approved it in October 2016. Id.
At the same time as the actions of the DOJ, twenty-three consumers filed an action in the District of Oregon, alleging that the merger posed a risk of decreased competition and monopoly so as to violate Section 7 of the Clayton Act. Id. at 762 & n.4. In Dehoog v. Anheuser-Busch InBev, SA/NV, 1:15-cv-02250-CL, 2016 WL 5858663 (D. Or. Oct. 3, 2016), the district court adopted Magistrate Judge Mark Clarke’s recommendation of dismissal with prejudice, finding that the “[c]onsumers failed to allege that the acquisition would increase ABI’s market power in the U.S. beer market; allegations regarding Molson’s future conduct in the ownership of MillerCoors were too speculative to state a claim for relief against ABI; and allegations concerning ABI’s buying power were too vague to state a plausible claim.” DeHoog, 899 F.3d at 762.
Ninth Circuit’s Analysis: Divestiture Stabilized ABI’s Market Share
In assessing the consumers’ claim, the Ninth Circuit first noted that Section 7 of the Clayton Act provides individuals with an injunctive remedy against “business acquisitions whose effect ‘may be substantially to lessen competition, or tend to create a monopoly’ in a relevant market.” Id. (quoting 15 U.S.C. § 18). Next, the court set forth the pleading standard, observing that Section 7 claims must adequately allege that the “acquisition creates ‘an appreciable danger’ or ‘a reasonable probability’ of anticompetitive effects in the relevant market.” Id. at 763 (quoting Saint Alphonsus Med. Ctr-Nampa Inc. v. St. Luke’s Health Sys., Ltd., 778 F.3d 775, 783 (9th Cir. 2015); FTC v. Warner Commc’ns Inc., 742 F.2d 1156, 1160 (9th Cir. 1984)). Under this standard, the court found that the consumers’ “allegations do not belly up to this bar.” Id.
SAB Was Not An Actual Competitor
Refuting the consumers’ claim that ABI’s acquisition of SAB “eliminated SAB as an ‘actual . . . competitor in the United States,’” id., the Ninth Circuit noted that the acquisition did not further concentrate competition in the U.S. beer market because SAB had been made to divest its only U.S.-based interests. Id. Further, SAB had only acted within the U.S. market as MillerCoors, and MillerCoors remained as a participant in the market. Id. at 764.
The Ninth Circuit also turned to an unpublished Ninth Circuit opinion to support its analysis. In Edstrom v. Anheuser-Busch InBev SA/NV, 647 F. App’x 733 (9th Cir. 2016), the Ninth Circuit found that ABI and Constellation’s acquisition of Modelo did not increase ABI’s market share because Constellation would hold exclusive rights to distribute Modelo in the United States. See DeHoog, 899 F.3d at 763–64. Thus, as in the case at hand, ABI’s actual share of the U.S. market remained the same, even as ABI made acquisitions.
SAB Was Not a Potential Competitor
Next, the court rejected the consumers’ argument that the acquisition would eliminate a potential competitor of ABI. The consumers argued that SAB was “on the edge” and “continually threatening to enter” the market, such that SAB had a beneficial effect on the market. Id. at 764 (internal quotation marks omitted). The Ninth Circuit, however, countered that SAB could not be both an actual and a potential competitor of ABI—by arguing that the acquisition violated Section 7 because it allowed a market participant to acquire a competitor, the consumers had alleged that SAB was an actual competitor. See id. The Ninth Circuit also emphasized that SAB had already entered the market via its joint venture in MillerCoors, and that any allegation that SAB could have ended the joint venture and re-entered the market was speculative. Id. at 764–65.
Arguments About MillerCoor’s Distribution Were Speculative
Similarly, the Ninth Circuit pegged as speculative the consumers’ argument that the acquisition and divestiture would affect MillerCoors’s distribution. Id. at 765. The consumers argued that “it is likely that a 100 percent Molson Coors-owned MillerCoors will follow ABI’s lead in its dealings with distributors,” id., prompting the Ninth Circuit to dismiss the allegation as “a classic speculative conclusion." Id.
The Ninth Circuit ultimately affirmed the district court’s dismissal with prejudice, finding that “the district court did not abuse its discretion in concluding that Consumers could not plead around the elephant in the room.” Id. The “elephant” here is that the DOJ-settled divestiture removed SAB as an ABI competitor, making it impossible for ABI to increase its U.S. market share via the acquisition. ABI did acquire a former competitor, but the somewhat complicated maneuvering that accompanied the deal meant that market concentration remained the same. In DeHoog, then, the Ninth Circuit has emphasized that, for Section 7 claims, it is the “ale”-a-gation of net impact on market concentration that matters.
Ian L. Papendick
Jeanifer E. Parsigian
Winston & Strawn LLP
In NorthBay Healthcare Group v. Kaiser Foundation Health Plan, Inc., the Northern District of California recently dismissed without leave to amend the plaintiffs’ antitrust claims based on monopolization and conspiracy-to-monopolize theories under Section 2 of the Sherman Act. No. 17-cv-05005-LB, 2018 WL 4096399 at *1 (N.D. Cal. Aug. 28, 2018). The dismissal was with prejudice because the Court had dismissed with leave to amend twice before, and thus any further amendment would be futile given the plaintiffs’ repeated failure to allege sufficient facts to state a plausible claim. Id. The Court expressly noted that the plaintiffs failed to heed the Court’s previous warnings to enhance their conclusory allegations. Id. at *1.
While the limited factual detail in the complaint provided a relatively straightforward basis to dismiss the plaintiffs’ claims, the Court’s careful analysis of antitrust injury principles makes the decision worthy of closer examination.
Plaintiffs NorthBay Healthcare Group and NorthBay Healthcare Corporation, a hospital group in Solana County, California, alleged that Defendants, Kaiser Foundation Hospitals, Inc., Kaiser Foundation Health Plan, Inc., and The Permanente Medical Group, Inc., which operated two major hospitals in the Solano area, used anticompetitive tactics to “steer” trauma patients away from Plaintiffs’ hospitals, and to send uninsured patients to Plaintiffs’ hospitals to drive up its costs. Id. at 3-5. Plaintiffs pleaded that, because trauma centers are particularly profitable to hospitals, the lost opportunities to treat trauma patients were particularly damaging. Id. at *11.
To support these allegations, Plaintiffs alleged a single instance in which paramedics received instruction from a defendant to route a Level II trauma patient to one of Defendants’ hospitals rather than to one of Plaintiffs’. Id. at *3. As to Plaintiffs’ claim that Defendants steered uninsured patients to Plaintiffs, the complaint described a single instance where a defendant called a plaintiff in an alleged attempt to transfer an uninsured homeless patient, who Defendants claimed previously received cancer treatment at one plaintiff’s hospital. Id.
Plaintiffs also sought to rely on harm to non-party Western Health Advantage (“WHA”), a non-profit health plan for which Plaintiffs were the only in-network hospitals in Solano County. Id. at 2-3. Plaintiffs argued that WHA was essentially the only competitor to Defendants’ health plans in Solano county. Because of the affiliation between Plaintiffs’ hospitals and WHA, Plaintiffs argued, conduct that weakening Plaintiffs necessarily weakens WHA, and resulted in harm to competition among insurance plans in the geographic market. Id.
The District Court’s Analysis
In granting Defendants’ motion to dismiss, the Court’s first focus was the conclusory nature of Plaintiffs’ allegations and minimal facts, including only a single example of a patient being “steered” to a Defendant hospital. However, notwithstanding the Court’s citation to Twombly’s plausibility requirement in the standard of review—which could have offered a basis to summarily dispose of Plaintiffs’ claims in light of the paucity of facts alleged in the Complaint—the Court went on to analyze and dismiss Plaintiffs’ claims under the a four-step test for antitrust injury, which requires: “(1) unlawful conduct, (2) causing an injury to the plaintiff, (3) that flows from that which makes the conduct unlawful, . . . and (4) that is of the type the antitrust laws were intended to prevent’—as well as a fifth element that ‘the injured party be a participant in the same market as the alleged tortfeasors. . .’” Id. at *6 (quoting Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489 (1977)).
The District Court started with the reminder that “Plaintiffs sometimes forget that the antitrust injury analysis must begin with the identification of defendant’s specific unlawful conduct.” Id. (citing Am. Ad. Mgmt. v. Gen. Tel. Co. of Cal., 190 F.3d 1051, 1055 (9th Cir. 1999)). Seeing only “‘[n]aked assertions devoid of further factual enhancement,’” Id. at *7 (quoting NorthBay Healthcare Grp. V. Kaiser Found. Health Plan, Inc., 305 F. Supp. 3d 1065, 1074 (N.D. Cal. 2018)), the Court held that Plaintiffs did not plausibly allege either unlawful “steering” or an unlawful termination of the parties’ reimbursement agreement, and therefore failed to sufficiently plead even the first element of an antitrust injury. Id.
The Court then proceeded to assess Plaintiffs’ allegations under the second and third requirements for antitrust injury: “‘a plaintiff must prove that his loss flows from an anticompetitive aspect or effect of the defendant’s behavior,’” and that “‘[i]f the injury flows from aspects of the defendant’s conduct that are beneficial or neutral to competition, there is no antitrust injury, even if the defendant’s conduct is illegal per se.’” Id. at *8 (quoting Rebel Oil Co. v. Atl, Richfield Co., 51 F.3d 1421, 1433 (9th Cir. 1995)) (emphasis in original). Having already found insufficient allegations of anticompetitive conduct, the outcome of the Court’s analysis was essentially a foregone conclusion. Nonetheless, the Court discussed in detail the multiple problems with Plaintiffs’ claimed injury from an antitrust injury perspective. Id. at *9.
Plaintiffs, the Court explained, could not meet their burden to plead antitrust injury with allegations of injury to patients, the consumers in the relevant market, whom the complaint alleged received deficient care due to Defendants’ “steering,” or with allegations of injury to Plaintiffs themselves, through the termination of the parties’ reimbursement agreement, where Plaintiffs “would have [been] injured … in the same way regardless of whether or not defendant has a potential to monopolize.” Id. at *10 (citing Am. Ad. Mgmt., 190 F. 3d at 1056).
Nor, the Court went on, were any of the Plaintiffs’ alleged injuries “of the type the antitrust laws were intended to prevent.” Id. at *11. The Court emphasized that “‘antitrust laws are only concerned with acts that harm allocative efficiency and raise the price of goods above their competitive level or diminish their quality.’” Id. (quoting Pool Water Prods. V. Olin Corp., 258 F.3d 1024, 1034 (9th Cir. 2011)) (emphasis in original). Plaintiffs’ argument of harm to competition—that without steady revenues, including from their trauma centers, to fulfill their significant debt obligations, Plaintiffs were in danger of being eliminated from the market, which would result in Defendants obtaining a monopoly over hospital services in the geographic market resulting in higher prices—did not persuade the Court. Plaintiffs could not rely on their allegedly vulnerable position in the market, resulting from what the Court characterized as a “bad business decision” of “overextending itself by taking out an unprecedented amount of debt,” to make “what is at best, a business tort or contract violation” into an antitrust injury. Id. at *12-13 (citing Hu Honua Bioenergy, LLC v. Haw. Elec. Indus., Inc., No. 16-00634 JMS-KJM, 2018 WL 491780, at *12 (D. Haw. Jan. 19, 2018)) (internal quotation marks omitted).
Finally, the Court rejected Plaintiffs’ attempt to claim antitrust injury based on alleged harm to its affiliate, non-party WHA, in the health insurance market. Relying on the “inextricably intertwined” doctrine, which allows a plaintiff that is not a market participant to establish antitrust injury and thus standing if its injury is sufficiently intertwined with the anticompetitive effect on the relevant market, Plaintiffs argued if they were driven out of hospital services market, WHA would be forced to exit the health insurance market, eliminating an important competitor to Defendants’ health plans. Id. at 14. The Court deemed this argument a “red herring,” holding that Plaintiffs had not plausibly alleged that Defendants’ conduct was threatening its existence, and the “invocation of the phrase ‘inextricably intertwined’ does not create an antitrust injury where one does not exist otherwise.” Id. at 15.
While grounding its decision in the woefully conclusory nature of Plaintiffs’ allegations of Defendants’ purportedly unlawful conduct, the Court’s extensive discussion of Plaintiffs’ claims within the framework of the antitrust injury elements is a helpful illustration of the type of antitrust injury theories that are insufficient to state an antitrust claim even if they had been supported by sufficient allegations of fact.
Robert E. Connolly
Law Office of Robert E. Connolly
On October 11, 2018, Judge Michael Baylson of the Eastern District of Pennsylvania denied a renewed summary judgment motion by a defendant in the wallboard class action price fixing litigation. The defendant, PABCO, moved the Court to reconsider and reverse an earlier denial of summary judgment based on the recent Third Circuit opinion in Valspar Corporation v. DuPont, 873 F. 3d 185 (3d Cir. 2017). Valspar affirmed a district court ruling that dismissed a price fixing complaint on the grounds that it merely alleged parallel conduct (conscious parallelism). Judge Baylson had previously denied PABCO’s summary judgment motion in a published opinion. In re: Domestic Drywall Antitrust Litig., 163 F. Supp. 3d 175 (E.D. Pa. 2016). Judge Baylson reconsidered but declined to reverse his early ruling denying PABCO’s summary judgment motion. Valspar did not cause Judge Baylson to change his ruling because unlike Valspar’s case, “there was evidence of ‘traditional’ conspiratorial evidence, specifically as to PABCO.” Judge Baylson’s most recent decision is Ashton Woods Holdings LLC v. USG Corp. (In re Domestic Drywall Antitrust Litigation), 2018 U.S. Dist. LEXIS 174981 (E.D. Pa. October 11, 2018).
This class action was originally brought by twelve large homebuilders alleging wallboard manufacturers had conspired to fix prices. After several years of litigation, settlements were reached with both direct and indirect purchasers of drywall. One defendant, PABCO, had not settled. Judge Baylson had denied PABCO’s prior motion for summary judgment. PABCO, however, was seeking a second bite at the summary judgment apple, relying on the Third Circuit’s recent decision in Valspar Corporation v. Dupont, 873 F. 3d 185 (3d Cir. 2017). PABCO argued that this decision required Judge Baylson to reconsider and change his prior decision denying PABCO summary judgment. The Court accepted PABCO’s invitation to review its prior decision, but rejected the request to change its ruling in light of Valspar.
Valspar was the latest in a line of Third Circuit cases applying summary judgment standards to price fixing allegations in the context of oligopoly markets and pricing historically referred to as “conscious parallelism.” Valspar, in turn, built on three recent Third Circuit cases, In Re Chocolate Confectionary Antitrust Litig., 801 F. 3d 383 (3d Cir. 2015), In re Flat Glass Antitrust Litig., 383 F. 3d 350 (3d Cir. 2004), and In re Baby Food Antitrust Litig., 166 F. 3d 112 (3d Cir. 1999). The cases stand for the unremarkable proposition that conscious parallelism alone, absent any “plus” factors, is insufficient to survive a motion for summary judgment in a price fixing case. The cases are important, however, for the factual analysis of what does, and what does not, constitute a plus factor. What is noteworthy about the wallboard case is that Judge Baylson applied this test to the facts in homebuilders’ case and found that summary judgment was properly denied, even post-Valspar, because there was evidence of a plus factor—“traditional” conspiratorial evidence. 2018 U.S. Dist. Lexis at *5-6. (“What distinguishes this case from Valspar is that in considering the plus factors in this case, there was evidence of “traditional” conspiratorial evidence, specifically as to PABCO.”) In Judge Baylson’s extensive prior opinion, he noted that traditional conspiracy evidence may be shown by proof that the defendants got together and exchanged assurances of common action or otherwise adopted a common plan even though no meetings, conversations, or exchanged documents are shown. 163 F. Supp. 3d at 195. Judge Baylson found these internal PABCO’s emails permitted an inference that PABCO participated in an agreement to eliminate job quotes and raise prices:
See 163 F. Supp. 3d at 255-57 (discussing emails from PABCO’s Director of Sales and VP of Sales and Marketing).
Judge Baylson’s analysis and characterization of certain evidence as “traditional” conspiracy evidence is worth a read in any conscious parallelism case where the search for “plus factors” makes or breaks a case. The judge cautioned, however, that the homebuilders must still prove at trial that PABCO was part of a price-fixing conspiracy.
Legal Intern, Federal Trade Commission
The Securities and Exchange Commission instituted cease and desist proceedings against Voya Financial Advisors, citing violations of the Safeguards Rule, and the Identity Theft Red Flags Rule. The proceedings constitute the first SEC enforcement action charging violations of the Identity Theft Red Flags Rule.
Voya Financial Advisors is an investment advisor offers a wide range of products and services. Voya sells its products through a national network of independent contractor representatives. The Safeguards Rule requires broker dealers and investment advisors to adopt written policies and procedures implementing practices for the protection of customer information. Voya violated the Safeguards Rule by implementing cybersecurity policies which were not “reasonably designed” to insure the confidentiality of sensitive customer information.
Between 2013 and 2017, Voya’s independent contractor representatives were given access to sensitive information about brokerage customers and advisory clients through a propriety web portal. During this time, Voya established cybersecurity policies, which required: a) an automatic session timeout after a period of inactivity in web applications containing PII, b) a prohibition of concurrent web sessions by a single user in web applications containing PII, and c) multi-factor authentication for access to applications containing PII.
Although Voya’s cybersecurity policies applied to all Voya personnel, the policies were not “reasonably designed” to apply to the systems used by independent contractors. Though prohibited by the company’s policy, Voya frequently allowed its contractor representatives to maintain concurrent web sessions, and failed to enforce automatic timeouts after long periods of inactivity in applications containing sensitive customer information. In addition, Voya’s multi-factor authentication procedures were inadequate, because the safeguards in place could be circumvented by calling Voya’s Customer Support team, and resetting an individual’s security questions.
Next, Voya’s incident response procedures were not “reasonably designed” to “detect and prevent” identity theft as required by the Identity Theft Red Flags Rule. The Identity Theft Red Flags Rule requires certain financial institutions to develop and implement a written identity Theft Prevention Program designed to detect and prevent identity theft. The rule also requires institutions to update their Identity Theft Prevention programs to reflect changes in the nature of risks to customers. Voya violated the Identity Theft Red Flags Rule by failing to implement a written Identity Theft Prevention Program, which could effectively detect and prevent identity theft. In April of 2016, hackers exploited weaknesses in the company’s cybersecurity infrastructure and gained access to sensitive information about nearly 5,600 customers. Afterwards, Voya employees failed to prevent further intrusions from the IP addresses responsible for the attack. Moreover, Voya did nothing to address the compromised user sessions, primarily because they mistakenly believed that resetting a user’s password would automatically terminate all active sessions.
Without admitting or denying the charges of misconduct, Voya Financial Advisors agreed to pay a fine of $1 million dollars, and to bring its practices into compliance with regulatory requirements. Voya also agreed to retain a Chief Information Security Officer, who will be responsible for maintaining revised cybersecurity policies that comply with regulatory requirements.