Joshua L. Young
Freitas Angell & Weinberg LLP
On June 30, 2017, Judge Beverly Reid O’Connell granted the National Football League’s (“NFL”) motion to dismiss a class action filed on behalf of commercial DirecTV subscribers, such as bar owners, and residential DirecTV subscribers. The court found the NFL’s exclusive deal allowing DirecTV to broadcast out-of-market Sunday afternoon games did not violate Section 1 or Section 2 of the Sherman Act. In re National Football Leagues Sunday Ticket Antitrust Litigation, 2017 WL 3084276 (C.D. Cal. June 30, 2017).
Since 1994, DirecTV has been the exclusive broadcaster of NFL games that would not otherwise be broadcast in a viewer’s geographic market. Id. at *3. During a typical week, six NFL games are broadcast in each geographic television market: Fox and CBS broadcast three games on Sunday afternoon; NBC broadcasts a game on Sunday night; ESPN broadcasts a game on Monday night; and NFL Network broadcasts a game on Thursday night. Id. The only way a viewer can see games that are broadcast outside of the viewer’s geographic market is by subscribing to DirecTV’s NFL Sunday Ticket. Id. For establishments like the Mucky Duck and Gael Pub (“commercial plaintiffs”), an NFL Sunday Ticket subscription can cost between $1,458 and $120,000. Id. For individuals like Robert Gary Lippincott, Jr. and Michael Holinko (“residential plaintiffs”) the cost for the 2015 season was $359.
The commercial and residential plaintiffs alleged that the defendants violated Section 1 of the Sherman Act “by agreeing to restrain competition in the licensing and distribution of live video presentations of NFL games with the purpose and effect of restraining trade and increasing prices paid by consumers and advertisers.” The agreements at issue were the “horizontal” agreements between NFL teams that pooled the teams’ rights to license out-of-market broadcasts and the “vertical” agreement between the NFL and DirecTV. Id. at *6-7. The plaintiffs argued that these agreements should be considered together as an “inseparable web of agreements or a hub-and-spoke conspiracy.” Id. The court disagreed, choosing instead to evaluate the horizontal agreements separately from the vertical agreement, because “where, as here, one alleged conspiracy may involve multiple types of agreements, or different relationships within one agreement, a court is required to break the conspiracy ‘into its constituent parts,’ and analyze ‘the respective vertical and horizontal agreements . . . either under the rule of reason or as violations per se.’” Id. at *8 (quoting In re Musical Instruments & Equip. Antitrust Litig., 798 F.3d 1186, 1192 (9th Cir. 2015)).
Relying on O’Bannon v. NCAA, 802 F.3d 1049, 1069 (9th Cir. 2015), In re Musical Instruments, 798 F.3d at 1191, and NCAA v. Board of Regents, 468 U.S. 85, 101 (1984), the court decided to evaluate “both the horizontal agreements between the NFL teams and the NFL and the vertical agreement between the NFL and DirecTV” under the rule of reason. 2017 WL 3084276 at *8.
Vertical Agreements Between NFL and DirecTV
The court began its analysis of the vertical agreements by considering whether the plaintiffs had antitrust standing. The defendants argued that the plaintiffs had suffered no antitrust injury because “Plaintiffs’ alleged injury—inflated prices for the purchase of live NFL game broadcasts—occurs in a different market than the vertical agreement between DirecTV and the NFL.” Id. at 9. The Court found this distinction to be “two sides of the same coin” because at a consumer level, DirecTV and the plaintiffs participated in the same relevant market, which was the broadcast rights for live video presentations. Id. This gave the plaintiffs “antitrust standing to challenge the vertical agreement between DirecTV and the NFL.” Id.
Next the Court considered whether the plaintiffs had alleged facts indicating that the vertical agreements were anticompetitive, including whether the agreements reduced output and inflated prices. The plaintiffs argued that “the exclusive distributorship between DirecTV and the NFL—limits output, because . . . if Sunday Ticket were not the exclusive method by which out-of-market games could be broadcast, ‘other competitive market options would have increased output further.’” Id. at *9. The defendants countered that before Sunday Ticket existed, viewers were unable to watch out-of-market Sunday afternoon games. Id. The court determined that the plaintiffs’ conception of “output” as the availability to viewers of out-of market Sunday afternoon broadcasts, was incorrect. Id. at *9-10.
The court discussed NCAA v. Board of Regents, which addressed a challenging to a broadcasting plan developed by the NCAA to protect live attendance of college football games. Id. The NCAA’s plan limited the number of games each NCAA institution could televise. Id. at *10. Judge O’Connell identified the limit on output found in NCAA v. Board of Regents as “a limit on the ability to broadcast games at all.” Id. at *11. Here, “there is no limit on output, i.e., no requirement that certain games not be broadcast at all; on the contrary, all NFL Sunday afternoon games are broadcast—there are merely limitations placed on where these games are broadcast and on who may broadcast them.” Id. The court determined “the proper definition of output and, more specifically, limitations on output,” to be “whether the agreement prevents certain games from being broadcast at all.” Id. Under this definition, there was no limit on output.
The plaintiffs also argued that output should be measured by “viewership,” defined as “the availability of viewers to see the games.” Id. Before Sunday Ticket, “viewers would have had access to no more than three NFL Sunday afternoon games broadcast in any given broadcasting market,” but “through Sunday Ticket, viewers may now access as many as thirteen games being played on Sunday afternoons—games which, before Sunday Ticket, would have gone unseen outside of the local broadcast market.” Id. Even if viewership, rather than the ability to broadcast games, was the appropriate measure for assessing output, the plaintiffs’ argument would fail: “because Sunday Ticket has increased access to out-of-market games, it has also increased viewership.” Id. at *12.
The court then rejected the plaintiffs’ argument that the vertical agreement was unlawful because it inflated prices. The “mere fact that DirecTV may be charging inflated prices for Sunday Ticket does not, on its own, constitute harm to competition.” Id. at *12. The plaintiffs’ price inflation allegations were therefore insufficient.
The Court also found several procompetitive aspects of the NFL’s agreement with DirecTV. The exclusive relationship gave DirecTV an incentive to invest in its Sunday Ticket subscription product and make out-of-market NFL games as appealing as possible, including through features such as “Red Zone Channel, DirecTV Fantasy Zone Channel, and NFL.com fantasy.” Id. With the exclusive right to market Sunday Ticket, “DirecTV can create, package, and promote these various products that result in greater fan access and NFL game exposure.” Id.
DirecTV is also periodically required to re-negotiate its agreement with the NFL. Id. The court cited evidence of a competing bid from another broadcaster as evidence that competition is not eliminated. Id. The Court dismissed the Section 1 claims, to the extent they were based on the NFL’s agreement with DirecTV because “Plaintiffs have not satisfied the third element of a section 1 claim under the rule of reason test; without harm to competition, there can be no section 1 violation.” Id.
Horizontal Agreements Between NFL Teams
The court determined that the Sports Broadcasting Act (“SBA”) does not immunize the NFL’s sale of broadcast rights, but nonetheless concluded that the plaintiffs lacked antitrust standing and failed to state a section 1 claim based on the horizontal agreements because the collective agreement between the teams involves“collectively owned” property requiring the NFL and its member teams “to cooperate in order to sell the rights.” Id. at *13 (citing Spinelli v. Nat’l Football League, 96 F. Supp. 3d 81, 114 (S.D.N.Y. 2015)).
“The SBA, enacted in 1961, exempts professional sports from the antitrust laws ‘for joint marketing of television rights.’” Id. (citing NCAA v. Board of Regents, 468 U.S. at 104 n.28). See 15 U.S.C. § 1291. The law applies only to broadcast channels. Id. (citing Kingray, Inc. v. NBA, Inc., 188 F. Supp. 2d 1177, 1187 (S.D. Cal. 2002)). The plaintiffs argued that the SBA did not apply because the NFL teams agreed to broadcast certain games over non-broadcast paid-for satellite television. Id. The defendants respond by pointing out that DirecTV’s “Sunday Ticket merely re-broadcasts coverage that was initially broadcast on free, over-the-air television—namely, CBS and Fox—and, thus, is protected by the SBA.” Id. Considering the “narrow” construction to be given antitrust exemptions, id., the Court agreed with the plaintiffs. “[B]ecause the agreement between the NFL and the NFL teams encompasses both broadcasts on over-the- air television as well as paid-for television, the SBA does not immunize the horizontal agreements between the NFL and the NFL teams.” Id.
Turning to the horizontal agreements between the NFL teams, the court discussed two cases holding that broadcasts of NFL games necessarily involve intellectual property rights owned by multiple entities. The court first discussed Washington v. National Football League, 880 F. Supp. 2d 1004, 1005– 07 (D. Minn. 2012), a case in which former professional football players alleged that the NFL violated the antitrust laws when it refused to grant them the rights to game films and images from the games in which they played. The Washington court explained that because multiple NFL teams were involved in creating the films and images of NFL games, “[t]hese entities must cooperate to produce and sell these images” and thus NFL teams “do not violate the Sherman Act when they market ‘property the teams and the NFL can only collectively own.’” Id. at *13 (quoting Washington, 880 F. Supp. 2d at 1006).
The Court also discussed Spinelli v. National Football League, in which professional photographers alleged that the NFL’s exclusive licensing agreements for professional stock photos violated the Sherman Act. Spinelli held that the agreements did not violate the Sherman Act because “many if not most of the photographs at issue contain intellectual property owned by the NFL and at least one NFL Club” and “without NFL and NFL Club cooperation, licensees would be unable to obtain from any one entity the rights to use photographs of NFL games and events, which exist only by virtue of that cooperation.” Spinelli, 96 F. Supp. 3d at 114.
The court observed that the NFL owns the broadcast rights to NFL games and thus operate differently from Major League Baseball and the National Hockey League, “where the league does not necessarily own the rights to every game broadcast.” 2017 WL 3084276 at *13. “Therefore, unlike the MLB or the NHL, the NFL must be involved in the sale of every game’s broadcast rights; without an agreement between the NFL and its teams, there would be no way to broadcast the game footage.” Id. at *15 (citing Spinelli, 96 F. Supp. 3d at 114 n.14.). “As the Court noted in Spinelli, ‘the pro-competitive benefits of collectively licensing intellectual property rights’ in NFL property ‘are abundantly clear.’” Id. The court thus concluded that “the NFL’s conduct in collectively working with its constituent teams to enter into exclusive broadcast agreements of game footage collectively owned by the NFL and its teams does not violate section 1 of the Sherman Act because it is not an unreasonable restraint on trade.” Id.
After determining that the plaintiffs failed to allege facts indicating that the horizontal agreements constituted a Section 1 violation, the court held that the plaintiffs lacked antitrust standing to “challeng[e] the horizontal agreement between the NFL and its teams because [the plaintiffs were] indirect purchasers.” Id. The court noted the “narrow” exceptions to the Illinois Brick rule, including the “co-conspirator” exception “where an indirect purchaser ‘establishes a price-fixing conspiracy between the manufacturer and the middleman.’” Id. (quoting In re ATM Fee Antitrust Litig., 686 F.3d 741, 749 (9th Cir. 2012)). In In re ATM Fee, the Ninth Circuit found this exception to apply “only when the conspiracy involves setting the price paid by the plaintiffs.” Id. at 16.
Because Plaintiffs are direct purchasers of the games from DirecTV (which DirecTV may only sell as a result of the agreement between DirecTV and the NFL), Plaintiffs have standing to sue for damages arising from the vertical agreement between DirecTV and the NFL (as discussed above). Plaintiffs do not directly purchase Sunday Ticket from the NFL Defendants, however, and the co-conspirator exception does not apply. Accordingly, Plaintiffs do not have standing to sue the NFL Defendants with respect to the horizontal agreements.
Because Plaintiffs are direct purchasers of the games from DirecTV (which DirecTV may only sell as a result of the agreement between DirecTV and the NFL), Plaintiffs have standing to sue for damages arising from the vertical agreement between DirecTV and the NFL (as discussed above). Plaintiffs do not directly purchase Sunday Ticket from the NFL Defendants, however, and the co-conspirator exception does not apply. Accordingly, Plaintiffs do not have standing to sue the NFL Defendants with respect to the horizontal agreements.
Id. at *16.
The Court also considered whether the plaintiffs had pled a relevant market in which the defendants had market power. Id. at 17. The plaintiffs alleged a relevant market comprised of “live video presentations of professional football games” and a submarket for the “broadcast rights for out-of-market games, such as those carried in the NFL Sunday Ticket package.” Id. The defendants argued that the relevant market was improperly defined because it failed to account for the competition out-of-market NFL games face from in-market broadcasts, as well as other sports and entertainment products. Id. The court disagreed, finding that the plaintiffs had properly defined the relevant market. Id. “It appears clear that professional sports attract a unique and specific audience; for instance, many viewers would not believe a Sunday afternoon marathon of NCIS, a syndicated drama, or the live broadcast of a tennis tournament to be a viable alternative to a Denver Broncos football game.” Id.
The Court next determined that the plaintiffs “fail[ed] to show how Defendants have restrained trade within that market or have such significant power as to artificially drive prices up.” Id. The NFL lacked the ability to artificially control out-of-market game pricing because by offering free broadcast games on Sunday afternoons, the NFL gave consumers the choice to “view these free games as alternatives to paid-for out-of-market games, thereby driving market prices down naturally.” Id. at 18. Furthermore, even if out-of-market games were not effective substitutes for in-market games because a given consumer wanted to view only one team’s game, “whoever ultimately owned the rights would always have some ability to artificially control prices, regardless.” Id. “In that case, neither the horizontal agreements between the NFL and the NFL teams nor the vertical agreement between the NFL and DirecTV would affect artificial price inflation; whoever owned the rights to any specific game—whether those rights were obtained through an exclusive distributorship agreement like Sunday Ticket or on the free market —could artificially inflate prices.” Id. at 18.
Finally, the court rejected the plaintiffs’ allegation of a relevant submarket consisting of out-of-market NFL games. Id. at 19. The court noted that a “‘plaintiff may not define a market so as to cover only the practice complained of,’ because ‘this would be circular or at least result-oriented reasoning.’” Id. (quoting Adidas Am., Inc. v. NCAA, 64 F. Supp. 2d 1097, 1102 (D. Kan. 1999)). “Unlike a market consisting of all live broadcasts of NFL games, an out-of-market football broadcast market is a post-hoc narrowing of the relevant market to cover only those products over which Plaintiffs allege that Defendants have control.” Id. The Court was also unconvinced that “out-of-market games would not, by definition, also compete with in-market games.” Id.
Section 2 Monopolization Claim
After dismissing the plaintiffs’ Section 1 claims, the court also rejected the plaintiffs’ claims that the NFL teams and DirecTV had conspired to monopolize the submarket for out-of-market games and that DirecTV had attempted to monopolize the broadcast of out-of-market games. Id. The plaintiffs’ conspiracy to monopolize claim failed because there was no antitrust injury and because the plaintiffs failed to demonstrate a specific intent to monopolize. Id.
Elizabeth C. Pritzker
Pritzker Levine LLP
On July 7, 2017, the Second Circuit Court of Appeals held in In re Petrobras Securities, ___ F.3d ___, 2017 WL 2883874 (2d. Cir. July 7, 2017), that the class certification requirements of Federal Rule of Civil Procedure 23 do not implicitly require that plaintiffs show there is an administratively feasible mechanism for determining whether putative class members fall within the class definition. Id, 2017 WL 2883874 at *9. The decision is important to parties litigating class certification issues in federal courts. By declining “to adopt a heightened administrative feasibility requirement at the class certification stage,” the Second Circuit rejected the approach adopted by courts in the Third Circuit (see, e.g., Byrd v. Aaron’s Inc., 784 F.3d 154, 166 (3d Cir. 2015)), and joined what the Second Circuit described as a “growing consensus that now includes the Sixth, Seventh, Eighth, and Ninth Circuits” on the issue. Id, at *9.
Petrobras is a multinational oil and gas company headquartered in Brazil and majority-owned in the Brazilian government. Petrobras, 2017 WL 2883874 at *1. Plaintiffs’ claims arise out of a conspiracy in which a cartel of contractors and suppliers coordinated with corrupt Petrobras executives to rig bids for major capital expenditures, such as the construction and purchase of oil refineries, at grossly inflated prices. Id., at *2. The profits generated by the scheme were used to pay billions of dollars in bribes and kickbacks to the corrupt executives and to government officials. Id. Additionally, the inflated bid prices artificially increases the carrying value of Petrobras’ assets. Id.
Eventually, Brazil’s Federal Police discovered the scheme during a money laundering investigation, and arrested a number of the individuals involved. Petrobras, 2017 WL 2883874, at *2. The arrests caused Petrobras to make corrective disclosures, and the value of Petrobras’ securities, which are traded on the Brazilian stock exchange, declined precipitously. Id., at *2-3. Plaintiffs are Petrobras investors who filed suit against Petrobras and its underwriters in the District Court for the Southern District of New York, alleging that defendants made false and misleading statements in violation of Section 10(b) of the U.S. Securities Exchange Act, 15 U.S.C. §§ 78a et seq., and the U.S. Securities Act, 15 U.S.C. §§ 77a et seq. Id., at *1, 3.
Because Petrobras securities are not exchanged on any U.S.-based exchange, in order to establish liability under the Exchange or Securities Acts, plaintiffs must show that their securities were acquired in “domestic transactions.” Petrobras, 2017 WL 2883874, at *6 (citing Morrison v. National Australia Bank, Ltd., 561 U.S. 247 (2010)). In light of this requirement, defendants urged the District Court to deny class certification under Federal Rule of Civil Procedure 23(b), arguing that because each class member’s transactions for “markers of domesticity,” plaintiffs cannot show that the class is ascertainable in the sense that class members can be identified reliably and with relative administrative ease. Id, at *6. The District Court agreed that the Morrison decision required plaintiffs’ class definition be limited to class “members [who] purchased Notes in domestic transactions” but nonetheless rejected defendants’ ascertainability arguments. The court certified two classes under Fed. R. Civ. P. 23(b), one asserting claims under the Exchange Act, and the other asserting claims under the Securities Act. Id, at *4, 6. Defendants appealed.
The Second Circuit’s “Ascertainability” Analysis
In rejecting defendants’ argument for a “‘heightened’ ascertainability requirement, under which the any proposed class must be ‘administratively feasible,’ over and above the evident requirement that a class be ‘definite’ and ‘defined by objective criteria” (Petrobras, 2017 WL 2883874, at *8), the Second Circuit considered Rule 23’s stated requirements as well as prior precedent from its own and other circuits.
The Court concluded that the “heightened ascertainability” standard articulated by the Third Circuit, in Byrd, was neither required by nor consistent with Rule 23, for two reasons.
First, the Second Circuit held, while such a standard “appears to duplicate Rule 23’s requirement that district courts consider ‘the likely difficulties in managing a class action,’ (Fed. R. Civ. P. 23(b)(3)(D)),” the redundancy actually ignores Rule 23(b)’s core balancing approach. Petrobras, 2017 WL 2883874, at *11. “Whereas ascertainability is an absolute standard,” the Court held, “manageability is a component of the superiority analysis, which is explicitly comparative in nature: courts must ask whether ‘a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.” Id (italics in original, citations omitted). Heightened ascertainability and superiority considerations could push in opposition directions, the Second Circuit observed, “and challenges of administrative feasibility might be most prevalent in cases in which there may be no realistic alternative to class treatment.” Id. Importing a “heightened ascertainability” standard into Rule 23 destroys the important, comparative analysis provided for in Rule 23(b), the Court held. Id.
Second, according to the Second Circuit, [t]the proposed [heightened] administrative feasibility test also risks encroaching on territory belonging to the predominance requirement, such as classes that require highly individualized determinations of member eligibility.” Petrobras, 2017 WL 2883874, at *11. “Like superiority, predominance is a comparative standard: Rule 23(b)(3) [ ] does not require a plaintiff seeking class certification to prove that each element of her claim is susceptible to classwide proof. What the rule does require is that common questions ‘predominate over any questions affecting only individual [class] members.’” Id (italics in original, citations omitted).
The Second Circuit concluded that “an implied administrative feasibility requirement would be inconsistent with the careful balance struck in Rule 23, which directs courts to weigh the competing interests inherent in any class certification.” Petrobras, 2017 WL 2883874, at *12. In the Second Circuit, unlike the Third Circuit, “the ascertainability requirement….asks districts courts to consider [only] whether a proposed class is defined using objective criteria that establish a membership with definite boundaries.” Id. “This modest threshold requirement will only preclude certification if a proposed class definition is indeterminate in some fundamental way,” the Court held. Id.
These holdings align the Second Circuit with the Sixth, Seventh, Eighth, and Ninth Circuits: each of these circuits have parted ways with the Third Circuit by declining to adopt an administrative feasibility requirement at the class certification stage. See Petrobras, 2017 WL 2883874, at 9 (citing, inter alia: Briseno v. ConAgra Foods, 844 F.3d 1121, 1123 (9th Cir. 2017); Sandusky Wellness Ctr. LLC v. Medtox Sci., Inc., 821 F.2d 992, 005-96 (8th Cir. 2016); Rikos v. Proctor & Gamble Co., 799 F.3d 497, 525 (6th Cir. 2015), cert. denied, ___ U.S. __, 136 S.Ct. 1493 (2016); and Mullins v. Direct Digital, LLC, 795 F.3d 654, 657-58 (7th Cir. 2015), cert denied, ___ U.S. ___, 136 S.Ct. 1161 (2016)).
Class Definition Satisfies Second Circuit Standard for “Ascertainability”
The Second Circuit concluded that the class definition approved by the District Court satisfied the ascertainability standard articulated in its opinion.
“The Classes include persons who acquired specific securities during a specific time period, as long as those acquisitions occurred in domestic transactions.” Petrobras, 2017 WL 2883874, at *12. “These criteria—securities purchases identified by subject matter, timing and location—are clearly objective. The definition is also sufficiently definite: there exists a definite subset of Petrobras Securities holders who purchased those Securities in ‘domestic transactions’ during the bounded class period.” Id. “Finding no error in the district court’s conclusions on this point,” the Second Circuit rejected defendants’ “contention that the classes defined by the district court fail on ascertainability grounds.” Id.
Implications for Future Class Actions
The Second Circuit’s Petrobras decision is not a wholesale win for the plaintiffs. Although the Court upheld the District Court’s class certification order on ascertainability grounds, it vacated the order, in part, and remanded the case for further consideration of whether each putative class member’s need to satisfy the “domestic transaction” element of federal securities laws fully comports with Rule 23 separate, but equally important, predominance requirements. Petrobras, 2017 WL 2883874, at *14-16.
The Second Circuit’s ascertainability ruling will have implications not only for securities class actions, but for class actions generally. In rejecting the Third Circuit’s heightened requirement for ascertainability, the Second Circuit has aligned itself with the Sixth, Seventh, Eighth and Ninth Circuits. Given the split among the circuits as to ascertainability, the Supreme Court may grant certiorari in a case that raises the issue to resolve the conflict.
Intern, Federal Trade Commission
In In re Digital Music Antitrust Litigation, 2017 U.S. Dist. LEXIS 111403 (S.D.N.Y. July 18, 2017), Senior Judge Loretta A. Preska denied the plaintiffs’ motion for certification of a nationwide class of digital music purchasers who challenged an alleged price-fixing conspiracy among music companies, and addressed various issues involving expert testimony submitted by the parties.
The plaintiffs filed a Sherman Act Section 1 complaint against Sony BMG Entertainment, UMG Recordings, Inc., Warner Music Group Corp., Capitol Records, Inc., Capitol-EMI Music, Inc., EMI Group North America, Inc., and Virgin Records America. Id. at *22-24. The defendants produce, license, and distribute music sold online and on compact disks. According to the complaint, the defendants control 80 percent of the market for digital music in the United States. Id. at *25. The plaintiffs alleged that the defendants conspired to restrain trade in and fix the prices of digital music in order to sell CDs at supracompetitive prices. Id.
The plaintiffs attempted to establish a conspiracy by pointing to digital music market conditions, the defendants’ participation in two joint ventures, and the use of most favored nation (“MFN”) clauses in all licensing agreements. Id. at *25-27. The claimed effect of the MFN clauses was to set a wholesale price floor for digital music of $.70 per song. The plaintiffs’ “core allegation” was that the alleged scheme “sustained high prices for Digital Music, which made it less attractive to consumers and hampered the growth of Digital Music services generally.” Id. at *27. The defendants’ motive, according to the plaintiffs, “was to support their ability to charge supracompetitive prices for CDs; they could do so because Digital Music was priced, through the alleged conspiracy, so as to be an unattractive or economically uncompetitive substitute.” Id.
Motions to Exclude
Professor Roger Noll
The court first considered the parties’ respective motions to strike expert testimony. The defendants sought to exclude testimony offered by Professor Roger Noll “on the grounds that it is ‘implausible as a matter of economics and antitrust theory and inconsistent with both the record and evidence and Prof. Noll’s own data and analysis.’” Id. at *34. The defendants’ argument “center[ed] on the contention that Professor Noll has materially changed his theory of liability in the course of this litigation.” Id. According to the defendants, Professor Noll had “alleged that the Defendants had conspired to fix wholesale prices for music downloads,” but his reply declaration “opines that the Defendants conspired to fix the profit margins that Defendants would make on each sale of music downloads sold to online distribution services.” Id. The defendants attributed the alleged change of Professor Noll’s analysis to “a series of admissions during his deposition that allegedly exposed flaws in his methodology.” Id.
The court found the support for the claim of a switch from a price fixing theory to a margin fixing theory “remarkably thin.” Id. In the court’s view, it was “readily apparent” that “none of the statements cited by Defendants aver that the conspiracy took the form of collusion on profit margins.” Id. at *35. The court found it unsurprising “that Professor Noll would cite profit margins as a measure of price collusion because prices and profit margins are inherently related.” Id. “[T]he percentage unit profit margin is the Lerner Index: L = (P-m)/P, where P is price and m is the marginal cost. Hence, if defendants agree to fix the price and if m is a constant, the price-fixing agreement also fixes the profit margin.” Id. (citing Noll Supp. Decl. at 5, Jan. 23, 2017, ECF No. 393). “Accordingly,” the court concluded, “the mere mention of using differences in profit margins to measure the impact and damages of a price-fixing conspiracy between the Defendants does not imply that Professor Noll changed his theory of the liability between the Noll Report and the Noll Reply.” Id. at *35-*36.
The court also determined that the defendants had “ignored the many statements by Professor Noll that are consistent with Plaintiffs’ theory of a price-fixing conspiracy.” Id. at 36. Professor Noll thus “provided a single method to show common proof of the alleged price-fixing conspiracy and one formula for calculating damages, namely, ‘us[ing] the difference in the percentage mark-up of price over marginal cost between digital downloads and the competitive benchmark products (CDs) to measure the anticompetitive effect of collusion on the prices of downloads and to generate a common formula for calculating damages for all digital downloads.’” Id. at *37.
Three of the defendants’ four arguments for the exclusion of Professor Noll’s testimony were predicated on the assumption that he had changed his theory of liability, and were therefore rejected. The fourth argument was that he failed “to account for relevant data concerning varied pricing throughout the class period that undermines Professor Noll’s pass-through regression analysis, in particular by excluding all observations of retail sales at $.99.” Id. at *39. The court concluded that the defendants did not respond to “Professor Noll’s justification for excluding certain price data from the pass-through regression,” and the court therefore “[did] not find a flaw in his methodology serious enough to warrant exclusion.” Id. at *39-*40.
Relying on Comcast Corp. v. Behrend, 133 S. Ct. 1426, 1433 (2013), which requires that “any model supporting a plaintiff’s damages must be consistent with its liability case,” the defendants also argued that Professor Noll based his assessment of liability and damages on a margin fixing theory, in conflict with the plaintiffs’ “wholesale price-floor conspiracy” theory. The court disagreed. Id.
Professor Janusz Ordover
The defendants submitted a supplemental declaration by Professor Janusz Ordover in support of their motion to exclude Professor Noll’s testimony. The plaintiffs moved to strike the supplemental declaration on the basis that it was a rebuttal to Professor Noll, rather than a declaration in support of the defendants’ Daubert motion. They also sought to exclude the supplemental declaration as “unreliable under Daubert.” Id. at *40-*41.
The court concluded that “the entirety of Professor Ordover’s supplemental declaration incorrectly assumes that Professor Noll changed his theory of liability from a conspiracy of price-fixing to margin-fixing.” Id. at *41. The court therefore considered the supplemental declaration little more than “a frivolous strawman” and thus “unreliable under Daubert.” Id. at *41-*42. But the court noted that the plaintiffs did not cite any “authority that would prevent Defendant from supporting a Daubert motion . . . with a declaration from their own expert witness.” Id. at *42. Considering the possibility that the supplemental declaration was an untimely sur-reply, the court denied the motion to strike because its determination that the supplemental declaration is unreliable under Daubert eliminated the possibility of prejudice to the plaintiffs. Id.
The plaintiffs also moved to exclude Professor Ordover’s rebuttal declaration testimony.
They argued that his “assertion that a majority of the proposed class members illegally downloaded Digital Music is unreliable,” taking particular issue with a study commissioned by defendant Sony. Id. at *44-*45. The court found the illegal downloading proposition supported by “a number of authorities” other than the challenged study, including work by Professor Noll. Id. at *45. Moreover, Professor Ordover did not attempt to establish that class members engaged in illegal downloading. His point was “to show why individualized inquiries will be necessary to determine which class members engaged in such illegal downloading in order to offset their damages.” Id. at *45. There being no demonstration that Professor Ordover’s principles or methodology were flawed, Daubert did not provide a basis for a challenge to his analysis. Id. at 46.
The plaintiffs disputed whether “Professor Ordover’s opinion that CDs are not a valid benchmark for Digital Music because of the lack of broadband internet penetration during the class period” applied “specifically to music buyers, who may have had higher adoption rates.” Id. But the court concluded that the plaintiffs “ignore the fact that Professor Ordover is responding to an assertion made by their own expert . . . .” Id. at 46-47. Professor Noll had stated that “for the large majority of consumers who own computers and high-speed Internet connections,” digital music and CDs “are functionally equivalent.” Id. at 47. He further commented that “if a consumer has the necessary electronic devices, a CD and a digital download are functionally equivalent in that either can be converted to the other at a small cost.” Id. “A finding of functional equivalency affects Professor Noll’s analysis in determining whether or not CDs and Digital Music are economic substitutes, thereby helping to define the relevant market.” Id.
Both Professor Ordover and Professor Noll noted low levels of broadband penetration during the early years of the class period. Id. The plaintiffs argument that the rate of broadband penetration for class members was “likely” much higher than the rate for all users went “to the weight of Defendants’ evidence rather than its admissibility and should therefore be left to the trier-of-fact's consideration.” Id. at *47-*48.
Professor Ordover argued that “tiered” or “variable” pricing “would have existed in the but-for world” in which the alleged conspiracy did not exist. Id. at *48. The plaintiffs claimed that Professor Ordover had ignored contrary evidence, but the court noted evidence cited by Professor Ordover, including evidence of “a high degree of price heterogeneity across products in the music world, including CDs, which Professor Noll uses as a benchmark in his model of liability.” Id. at *48-*49. The court concluded that the plaintiffs failed to establish that Professor Ordover’s opinion is unreliable. Id. at *49.
The plaintiffs also challenged testimony by Professor Ordover “that Apple, rather than the Defendants, controlled the price of Digital Music and his pass-through calculations” as unreliable. Id. This, the court concluded, involved nothing more than a dispute about the interpretation of admissible evidence, and thus did not provide a basis for exclusion. Id. at *50-*51. The challenge to Professor Ordover’s “decision to cut off his pass-through regression analysis at $1.00” was rejected because Professor Ordover explained his reasoning and the plaintiffs’ “disagreement” did not provide a basis for exclusion. Id. at *53.
The plaintiffs’ remaining arguments regarding Professor Ordover’s testimony about differences in margins between artists, singles and albums, digital music sold at different prices, and albums with different numbers of tracks were held not to show his testimony unreliable, except as to price variability for digital downloads and albums, for which the defendants relied on the previously rejected argument that Professor Noll had changed his theory. Id. at *55-*59.
Mr. Read, a digital forensics expert, testified that “the only way to determine whether each track was lawfully purchased by a putative class member is to analyze the metadata on the particular track, which would then be compared with the individual’s account information with a specific DSP to determine whether an individual track associated with the account used or owned by each individual proposed class member,” and that none of “the hundreds of available metadata fields associated with the music files produced by the plaintiffs” indicated “the prices paid for each track or each album.” Id. at *59-*60.
The plaintiffs argued that Mr. Read had drawn a legal conclusion about the lawfulness of the purchases, and that the work he performed “is not based on specialized knowledge that will assist the trier of fact.” Id. at *60. The court rejected both arguments. Id. at *60-*66. Mr. Reed addressed “the methodology required to assess whether Plaintiffs’ Digital Music files contain indicia of legitimate purchases,” and his testimony did not “apply the legal standards applicable to class certification to the record evidence.” Id. at *60-*61. The plaintiffs did not “explain how the Court or the jury could convert a Digital Music file into a set of cognizable metadata fields that they could then review to conclude that a Digital Music file was associated with a particular user account for a specific DSP.” Id. at *64. “Mr. Read’s opinion is based on sufficient evidence (i.e., the Plaintiffs’ Digital Music tracks) and reliable methods and principles, including a commonly accepted digital forensic tool, ExifTool, Mr. Read’s years-long experience as a forensic examiner, and the same type of analysis he has employed in IP infringement cases to determine the disputed source of data. Id. at *64-65.
The plaintiffs sought certification of a nationwide injunctive relief class of digital music purchasers pursuant to Rule 23(b)(2) and nine damages classes under the laws of eight states and the District of Columbia pursuant to Rule 23(b)(3). The defendants opposed class certification on various grounds, including typicality and commonality, and the manageability of the class. Id. at *67-*68. The court sided with the defendants and denied class certification.
The court found the proposed class to meet the “implied requirement of ascertainability.” There was sufficient proof of purchase of digital music by the proposed class representatives, and the proposed class has “definite boundaries: those persons who acquired Digital Music during the class period.” Id. at *79-*81. But the plaintiffs’ claim that transaction data “allegedly retained by Apple and other DSPs will render the proposed class members ascertainable if the class is certified” was found insufficient. Id. at *82-*83.
The court found that the plaintiffs failed to satisfy the Rule 23(a) typicality requirement as a result of illegal downloading of music by members of the class. The defendants argued that the plaintiffs cherry-picked class representatives in an attempt to avoid this problem. Id. at *73. Over time, the plaintiffs added 13 class representatives and withdrew 13 others, “in order to find individuals who can both provide proof of music download purchases during the class period and did not engage in illegal downloading.” Id. at *73. The court noted that “the proposed class is filled with members who cannot demonstrate proof of purchase and downloaded music illegally.” Id. at *74. “[M]any proposed class members will be subject to counterclaims for a setoff of Plaintiffs’ damages as a result of having engaged in illegal downloading.” Id.
In Gary Plastic Packaging Corp. v. Merrill Lynch, 903 F. 2d 176, 180 (2d Cir. 1990), the Second Circuit held that class certification is inappropriate when the proposed class representatives are subject to unique defenses. The court held certification is also improper when it is the proposed class members who are subject o unique defenses. Id. at *75-*76. In addition to the language of Rule 23(b)(3), the court considered this conclusion “a necessary backstop to the discovery abuses evident in this litigation, where Plaintiffs have spent years engineering the current set of Class Representatives presumably in order to circumvent the rule in Gary Plastic.” Id. at *75-*76.
The Court denied certification of the proposed Rule 23(b)(2) class because: (1) the plaintiffs made only conclusory allegations that the alleged anticompetitive conduct was ongoing and thus could not show a threat of future harm, and (2) the plaintiffs’ proposed injunction would not provide a remedy for all class members. Professor Noll had acknowledged that “prices in the but-for world of at least some single track downloads would be higher than they are under the alleged conspiracy.” Id. at *85. An injunction would therefore not “inure to the benefit of all indirect-purchaser class members in the form of lower retail prices.” Id. at *85.
The defendants argued that the plaintiffs did not satisfy the Rule 23(b)(3) predominance requirement because “Professor Noll’s model fails to account for price variability in the but-for world.” Id. at *88. Some prices would have been higher than those that resulted from the alleged conspiracy, and “class members who bought music that, in the but-for world, would have been priced above the $.99 retail price cannot claim to have been overcharged for that purchase as a result of the conspiracy.” Id. at *87-*88. Thus “[d]etermining whether any given class member was injured by the alleged conspiracy or, in fact, benefitted from it by paying less for such downloads than he or she otherwise would have, would require analyzing each purchase made by that class member and determining the price at which each such track would have been sold in a world absent the alleged conspiracy. In other words, the prevalence of price variability in the but-for world, which Professor Noll concedes most likely would have existed, would require the Court to perform a host of individualized inquiries regarding price tiers of Digital Music sold during the class period and the purchase histories of each of the millions of proposed class members.” Id. at *88.
The plaintiffs therefore “failed to show that they can prove by common evidence that all class members were injured by the alleged price-fixing conspiracy,” and, if the class were certified, “individual issues related to damage calculations would overwhelm questions common to the class.” Id. at *91-*92.
A further predominance issue was presented by Professor Noll’s use of a uniform pass-through rate. Professor Noll “assumes despite contrary evidence that the retail price is a linear function of the wholesale price, i.e., that causation runs solely from wholesale prices to retail prices,” and his finding of “a uniform 140% pass-through rate” was held unreliable. Professor Noll had examined data only from Apple, although other DSPs accounted for approximately 20% of the track sales for the period for which the defendants provided transaction data. Id. at *94-*95. Evidence suggested that the pass-through rate applicable to WalMart was zero. Id. at *95. “Given the absence of a common pass-through rate, determining the correct pass-through would require conducting separate inquiries for each DSP.” Id. Because Professor Noll’s uniform pass-through rate was not supported by the evidence, his model did not provide a common methodology for assessing injury or damages such that the plaintiffs could establish the predominance of the common issues. Id.
The “unclean hands” issues associated with the illegal downloading of music by class members also defeated predominance. The plaintiffs made various arguments challenging the relevance of unclean hands defenses to the predominance inquiry, but the court held none sufficient to preclude consideration of the defenses. Id. at *97-*106. Given “overwhelming” statistical evidence of the frequency of illegal downloading, the plaintiffs would be required to “devote considerable time to rebut” the unclean hands defenses. Id. at *106-*107. “Considering the scale of illegal downloading of Digital Music that took place during the class period, Defendants’ counterclaims on the basis of unclean hands and individual damage calculations would rapidly become the focus of this litigation,” and the common issues were not shown to predominate. Id. at*108-*109.
Finally, the proposed Rule 23(b)(3) class, which included nine indirect purchaser subclasses, was not certified on the basis that differences in the various state laws would render the classes unmanageable. The court noted differences among the state laws as to both the proof requirements and affirmative defenses, id. at *110-*111, and the possibility that numerous choice of law determinations would be needed. Id. at *111.
The plaintiffs argued that the variations in state law were not a significant obstacle because the laws are to be construed in harmony with federal antitrust law. Id. at *110. The plaintiffs also argued that the variations in state law would “likely fall into a handful of clearly discernible statutory schemes.” Id. at*112. The court was not satisfied with what it called the “conclusory speculation” presented by the plaintiffs, id., and it noted the plaintiffs’ failure to respond to the defendants’ arguments about the differences in the unclean hands defenses under the various state laws or “the need for individualized choice of law determinations.” Id.
Robert E. Freitas
Freitas Angell & Weinberg LLP
In In re Pre-Filled Propane Tank Antitrust Litigation, 860 F.3d 1059 (8th Cir. 2017) (en banc), a 5-4 majority of the Eighth Circuit reversed the dismissal of a Sherman Act Section 1 claim complaint brought by “direct purchasers who bought tanks directly from Defendants for resale.” Id. at 1063. The plaintiffs alleged that the defendants “colluded to decrease the fill level of tanks” and charged “supracompetitive prices . . . throughout the Class Period.” Id.
The running of the limitations period generally “commences on the date the cause of action accrues, that being, the date on which the wrongdoer commits an act that injures the business of another.” Id. at 1063 (citing Varner v. Peterson Farms, 371 F.3d 1011, 1019 (8th Cir. 2004). The Pre-Filled Propane Tank plaintiffs alleged a “continuing violation” of Section 1. Id. A “continuing violation” “restarts the statute of limitations period each time the defendant commits an overt act.” Id. “An overt act has two elements: (1) it must be a new and independent act that is not merely a reaffirmation of a previous act, and (2) it must inflict new and accumulating injury on the plaintiff.” Id. (citing Varner, 371 F.3d at 1019).
The plaintiffs alleged “two types of overt acts within the limitations period: (1) Defendants’ sales to Plaintiffs at artificially inflated prices; and (2) conspiratorial communications between Defendants about pricing and fill levels.” Id. at 1063-64. The court of appeals considered “whether sales at artificially inflated prices are overt acts that restart the statute of limitations,” and “whether Plaintiffs allege a continuing violation exception sufficient to restart the statute of limitations.”
Klehr v. A.O. Smith Corporation, 521 U.S. 179 (1997), stated that “in the case of a ‘continuing violation,’ say, a price-fixing conspiracy that brings about a series of unlawfully high priced sales over a period of years, ‘each overt act that is part of the violation and that injures the plaintiff, e.g., each sale to the plaintiff, ‘starts the statutory period running again, regardless of the plaintiff’s knowledge of the alleged illegality at much earlier times.’” Id. at 189. The defendants argued that Klehr, a RICO case, was not controlling because the quoted language is dicta. 860 F.3d at 1064. Some cases suggest that lower courts are “bound” by Supreme Court dicta. Id. While the idea that lower courts are “bound” by dicta “goes too far,” id., Supreme Court dicta is due appropriate deference. Id. at 1064-65.
“Klehr’s definition of a continuing violation follows longstanding Supreme Court precedent,” id. at 1065, beginning with Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481 (1968). See also Zenith Radio Corp. v. Hazeltine Research, Inc., 401 U.S. 321 (1971). Moreover, “[e]very other circuit to consider this issue applies Klehr, holding that each sale in a price-fixing conspiracy is an overt act that restarts the statute of limitations. 860 F.3d at 1065-66 (citing Oliver v. SD-3C LLC, 751 F.3d 1081, 1086 (9th Cir. 2014), In re Travel Agent Comm’n Antitrust Litig., 583 F.3d 896, 902 (6th Cir. 2009), In re Cotton Yarn Antitrust Litig., 505 F.3d 274, 290-91 (4th Cir. 2007), and Morton’s Mkt., Inc. v. Gustafson’s Dairy, Inc., 198 F.3d 823, 828 (11th Cir. 1999)).
The Eighth Circuit had applied Klehr to new sales in In re Wholesale Grocery Products Antitrust Litigation, 752 F.3d 728 (8th Cir. 2014). The defendants argued that Wholesale Grocery did not apply because “the anticompetitive nature of the wholesalers’ agreement” was not known until several years after the asset exchange by which the violation was allegedly accomplished.” Id. at 1066. The Eighth Circuit rejected this attempt to distinguish Wholesale Grocery, as “knowledge of anticompetitive conduct is not relevant to the continuing violation analysis.” Id. Klehr stated that “each sale to the plaintiff, starts the statutory period running again, regardless of the plaintiffs’ knowledge of the alleged illegality at much earlier times.” Id. at 1066-67 (citing Klehr, 521 U.S. at 189.
The defendants also relied on Varner v. Peterson Farms, 371 F.3d 1011 (8th Cir. 2004), for the idea that “continued anticompetitive conduct, without more, does not restart the limitations period.” 860 F.3d at 1067. Varner held that “[a]cts that are merely unabated inertial consequences of a single act do not restart the statute of limitations.” Id. (citing Varner, 371 F.3d at1019-20). The court of appeals considered Varner, a tying case, distinguishable. Id.
The court cited Areeda and Hovenkamp for the proposition that “application of the continuing violation doctrine in the antitrust context depends on the nature of the violation and whether it involves a ‘cartel, vertical agreement or refusal to deal, monopolization, or merger.’” Id. (citing P. Areeda & H. Hovenkamp, Antitrust Law: An Analysis of Antitrust Principles and Their Application, ¶ 320c(1) (4th ed. 2016)). The alleged horizontal price-fixing agreement gave the defendants “unlawfully acquired market power to charge an elevated price.” Id. (citing Wholesale Grocery, 752 F.3d at 736). “Each time Defendants used that power (i.e., each sale), they committed an overt act, inflicting new and accumulating injury.” Id.
The court also distinguished Midwestern Machinery Co., Inc. v. Northwest Airlines, Inc., 392 F.3d 265 (8th Cir. 2004), a merger case. Midwestern Machinery noted that “[a] continuing violation theory based on overt acts that further the objectives of an antitrust conspiracy in violation of § 1 of the Sherman Act or that are designed to promote a monopoly in violation of § 2 of that act cannot apply to mergers under § 7 of the Clayton Act.” Id.
The court rejected the defendants’ argument that the Klehr rule “encourages plaintiffs to sleep on their rights.” Id. at 1068. “[T]he Klehr rule does not discourage timely filed suits because a ‘plaintiff cannot use an independent, new predicate act as a bootstrap to recover for injuries caused by other earlier predicate acts that took place outside the limitations period.’” Id. at 1068 (citing Klehr, 521 U.S. at 190). Klehr was thus held controlling.
The court also held that the complaint adequately alleged a continuing violation. The defendants argued that key allegations of the complaint were“impermissibly vague and conclusory.” Id. at 1070. The court observed that the plaintiffs “need not provide specific facts in support of their allegations.” Id. (citing Schaaf v. Residential Funding Corp.,517 F.3d 544, 549 (8th Cir. 2008). All that is required is “sufficient factual information to provide the‘grounds' on which the claim rests, and to raise a right to relief above a speculative level.” Id. With the complaint read “liberally in the light most favorable to” the plaintiffs, the allegations “plausibly give rise to an entitlement to relief.” Id.(citing Eckert v. Titan Tire Corp., 514 F.3d 801, 806 (8th Cir. 2008) and Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)).
The defendants also agued that the allegation that “the propane conspiracy succeeded” made “the maintenance of fill levels and prices mere ‘unabated inertial consequences’ and not overt acts continuing the conspiracy.” Id. The question was not, however, “whether the amended complaint alleges other overt acts in addition to sales to the Plaintiffs; the issue is whether the amended complaint alleges that the conspiracy continued when the sales took place. If so, under Klehr, ‘each sale to the plaintiff,’ is an overt act that restarts the statute of limitations.” Id.
The court also noted that it had “never applied the ‘unabated inertial consequences’ test to a horizontal price-fixing conspiracy, let alone one where Plaintiffs allege that ‘sales pursuant to the conspiracy continued throughout the Class Period,’ and ‘Defendants continued to have regular communications regarding pricing, fill levels, and market allocation until at least late 2010.’” Id. at 1071.
Judge Shepherd, joined in whole or in part by three judges, dissented. He considered the majority opinion to “incorrectly interpret Supreme Court precedent, fail to hold the plaintiffs’ complaint to the plausibility standard of Twombly and Iqbal, and ignore the purposes of the antitrust statute of limitations.” Id. The majority opinion “interprets the antitrust discussion in Klehr completely divorced from the facts and issues confronting the Supreme Court in that case.” Id. In context, according to Judge Shepherd, Klehr requires a live, ongoing conspiracy within the limitations period to survive a motion to dismiss.” Id.
Judge Shepherd stated that the Supreme Court’s comment on antitrust law “served only to illuminate the discussion of tolling RICO claims.” Id. The Supreme Court relied on Areeda and Hovenkamp, which, a few sentences after the sentence quoted by the Court, said “so long as an illegal price-fixing conspiracy was alive, each sale at the fixed price [started the four-year statute of limitation anew].” Id. Therefore sales can restart the limitations period only “so long as an illegal price-fixing conspiracy is alive and ongoing.” Id.
Judge Shepherd saw Hanover Shoe and Zenith Radio as consistent with his analysis. Id. at 1073. Without the requirement of a “live, ongoing conspiracy,” “plaintiffs could sue many years after an antitrust violation occurred and seek damages for subsequent sales without tying the prior antitrust violation to the subsequent sales.” Id. In Judge Shepherd’s view, the allegations of the complaint were not sufficient to meet this standard. Id. at 1073-75.
Judge Shepherd also considered the approach taken by the majority to be “counter to the purposes that underlie the imposition of a limitations period in private antitrust actions.” Id. The majority approach did not encourage timely filing that would limit public harm or provide repose to defendants. Id. Klehr became a “sledgehammer” used “to shatter the antitrust statute of limitations.” Id.