Harrison (Buzz) Frahn
Simpson Thacher & Bartlett LLP
On August 15, 2018, the Ninth Circuit issued a decision affirming the dismissal of an antitrust suit against Mitsubishi Corp. and a Mexican salt company jointly owned by Mitsubishi and the Mexican government. Sea Breeze Salt, Inc. v. Mitsubishi Corp., No. 16-56350, 2018 WL 3863842 (9th Cir. Aug. 15, 2018). The Ninth Circuit held that the “act of state doctrine”—which prohibits “the courts of one country” from sitting “in judgment on the acts of the government of another done within its own territory”—precluded a U.S. court from adjudicating plaintiffs’ claims regarding the Mexican salt company’s decision to sell its salt exclusively to Mitsubishi. Id. at *3, 9. According to the court, the decisions of the Mexican salt company regarding the disposition of the country’s salt was a sovereign act, and passing judgment on plaintiffs’ claims would require a U.S. court to declare that sovereign act invalid. Id. at *3-6. The court stressed, however, that the decision was limited to the particular facts of the case and that the act of state doctrine is “not a license for courts to dismiss cases . . . whenever a foreign state-owned enterprise is involved.” Id. at *9.
In April 2016, Sea Breeze Salt, Inc., a California-based company, and Innofood, S.A. de C.V., a Mexican company, filed suit in the Central District of California against Mitsubishi Corporation, Mitsubishi International Corporation (collectively “Mitsubishi”), and Exportadora de Sal, S.A. de C.V. (“ESSA”). Sea Breeze Salt, Inc. v. Mitsubishi Corp., CV 16-2345-DMG (AGRx), 2016 WL 8648638, at *1 (C.D. Cal. Aug. 18, 2016). ESSA is a joint venture between the government of Mexico and Mitsubishi that produces 90% of Mexico’s salt exports and nearly 17% of total global salt output. Id. The Mexican government owns 51% of ESSA, with the remaining 49% owned by Mitsubishi. Id.
Among other claims, plaintiffs alleged an illegal conspiracy between Mitsubishi and ESSA in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1 et seq., and sought injunctive relief. Id. at *1, 6. As alleged by plaintiffs, for decades ESSA sold its entire salt output exclusively to Mitsubishi. Id. at *1. But beginning with the appointment of reformist Jorge Lopez Portillo Basave as ESSA’s Director General in February 2014, ESSA entered into contracts to supply competing distributors—including Innofood—with solar sea salt. Id. After Mr. Portillo was terminated later that year, however, ESSA refused to honor the contract with Innofood, causing Innofood to breach its contract to supply salt to Sea Breeze. Id. According to plaintiffs, ESSA’s refusal to honor Innofood’s contract was part of a scheme to return to supplying its entire output of salt exclusively to Mitsubishi. Id.
Mitsubishi moved to dismiss the suit in its entirety pursuant, in part, to the act of state doctrine. Sea Breeze Salt, Inc., 2016 WL 8648638, at *1-2. On August 18, 2016, Judge Dolly M. Gee dismissed the claims against Mitsubishi, agreeing that the act of state doctrine applied to bar the court from intervening. Id. at *3-6. Judge Gee also subsequently dismissed the claims against ESSA both for failure to serve ESSA and because the act of state doctrine would apply “with equal (if not greater) force to ESSA.” Sea Breeze Salt, Inc., 2018 WL 3863842, at *2.
The Ninth Circuit Affirms Dismissal Pursuant to the Act of State Doctrine
On appeal by Innofood and Sea Breeze, the Ninth Circuit reviewed the district court’s decision de novo and reached the same conclusion, affirming dismissal of the suit under the act of state doctrine. Id. at *2, 9.
As described by the Ninth Circuit, the act of state doctrine is “a consequence of the domestic separation of powers, reflecting the strong sense of the Judicial Branch that its engagement in the task of passing on the validity of foreign acts of state may hinder the conduct of foreign affairs.” Id. at *2 (citing W.S. Kirkpatrick & Co. v. Envtl. Tectonics Corp., Int’l, 493 U.S. 400, 404 (1990) (internal quotation marks omitted)). The doctrine “bars suit where ‘(1) there is an official act of a foreign sovereign performed within its own territory; and (2) the relief sought or the defense interposed [in the action would require] a court in the United States to declare invalid the [foreign sovereign’s] official act.’” Id. at *3 (quoting W.S. Kirkpatrick & Co., 493 U.S. at 405).
In determining whether ESSA’s actions were the official acts of a foreign sovereign, the Ninth Circuit first explained that ESSA’s corporate status did not render it incapable of performing an official act of the Mexican government because “[t]he critical question is not the identity of the actor, but rather the nature of the act itself.” Id.
Comparing Mexico’s decisions regarding salt output to decisions by other sovereign actors regarding the disposition of oil, uranium, and even Bangladeshi rhesus monkeys, the Ninth Circuit noted that Mexico’s Constitution explicitly states that “all minerals or substances . . . such as . . . rock-salt and the deposits of salt formed by sea water” are owned by the state. Id. at *3–4 (quoting CONSTITUCIÓN POLITICA DE LOS ESTADOS UNIDOS MEXICANOS, Art. 27). Explaining that “a nation’s decisions about the exploitation of its own natural resources are quintessentially sovereign in nature,” the court held that “Mexico’s salt is a sovereign natural resource” and that its “exploitation is therefore a sovereign act.” Id. at *3.
Addressing the second prong of the act of state doctrine, the court noted that adjudicating plaintiffs’ claims would require the court to decide the lawfulness of ESSA’s decision to refuse to honor all of its distribution contracts with parties other than Mitsubishi. Id. at *5–6. Accordingly, as the court found, granting injunctive relief “would amount to a quite literal instruction to Mexico to alter the way it profits from its salt” and therefore require the court to invalidate Mexico’s official act. Id. at *6.
The Act of State Doctrine is Not an Absolute Bar to Suit Against a Foreign Government-Owned Company
Although the act of state doctrine prohibited suit against Mitsubishi and ESSA in this case, the Ninth Circuit took care to “emphasize the narrow nature” of its decision. Id. at *9 (clarifying that the doctrine is not a blanket bar to an antitrust suit every time the facts involve “a foreign state-owned enterprise” or even “a government-owned company that operates in an industry related to natural resources”). Indeed, the court specifically addressed two possible exceptions to the act of state doctrine: (1) where the policies underlying the doctrine do not justify its application; and (2) where governments “exercise only those powers that can also be exercised by private citizens” and engage in “purely commercial acts.”
To determine whether the policies underlying the doctrine justify its application, the court evaluated the “Sabbatino Factors”, i.e., (a) “the degree of codification or consensus concerning a particular area of international law,” (b) “the implications of an issue . . . for our foreign relations,” and (c) whether “the government which perpetuated the challenged act of state is no longer in existence.” Id. at *6 (quoting W.S. Kirkpatrick & Co., 493 U.S. at 409). In this case, however, the Ninth Circuit found that application of the doctrine was justified because (i) there are “no international norms against exclusive arrangements in the extraction and export of a country’s resources,” which would weigh in favor of court intervention, (ii) a court order in the case enjoining ESSA’s actions “would be inherently offensive to the principle of co-equality among international sovereigns and would therefore be likely to impinge the executive’s ability to conduct foreign relations in a coordinated manner,” (internal citation omitted) and (iii) the government of Mexico continues to exist. Id. at *6-7.
The court also entertained the possibility of an exception for “purely commercial acts” based on the 1976 opinion of a four-Justice plurality of the Supreme Court in Alfred Dunhill of London, Inc. v. Republic of Cuba, 425 U.S. 682, 695–706 (1976). Sea Breeze Salt, Inc., 2018 WL 3863842, at *7–8. After observing that the Fifth and Eleventh Circuits have rejected the commercial exception altogether, while the D.C. Circuit has “arguably” accepted it, the Ninth Circuit joined the Second, Third, and Sixth Circuits by acknowledging the Dunhill plurality’s view, but declining to decide whether such an exception exists. Id. at *8. Rather than take a definitive position, the court suggested that “any commercial exception” may actually be “subsumed within the prima facie requirement that the challenged conduct constitute an ‘official act of a foreign sovereign.’” Id. at *8 n.4 (quoting Credit Suisse v. U.S. Dist. Court, 130 F.3d 1342, 1346 (9th Cir. 1997)). According to the Ninth Circuit, however, even decisions regarding the disposition of natural resources might be commercial acts (rather than official acts) under the prima facie requirement in the right circumstances.See id. at *9. Moreover, the court signaled that its analysis in this case might have differed if the decisions at issue had involved “individual lots of already-produced salt,” but explained that ESSA’s decision to sell its entire salt output to Mitsubishi was not meaningfully different from the Mexican government “granting a foreign company an exclusive concession to extract salt,” which plaintiffs acknowledged would be an official sovereign act. Id. at *4.
The Ninth Circuit’s opinion in Sea Breeze Salt, Inc. affirmed that the act of state doctrine may bar suit against a government-owned company or joint venture when the actions subject to suit are the official acts of a foreign sovereign. In this case, decisions regarding the disposition of 90% of Mexico’s salt output, made by a Mexican salt company that was majority-owned by the government of Mexico, were the official acts of the Mexican government and could not form the basis for an antitrust suit. The Ninth Circuit, however, expressly left open the possibility for future suits against state-owned companies or joint ventures alleging different facts to survive the act of state doctrine analysis, even where decisions regarding the disposition of a foreign country’s natural resources are involved.
Matthew S. Weiler
Bleichmar Fonti & Auld, LLP
Background and Summary
Grace is a class action brought by owners of iPhone 4 and iPhone 4S concerning the FaceTime feature. Plaintiffs allege that Apple misled iPhone users about being able to use FaceTime on their iPhone 4 and 4S models, and that Apple deliberately disabled “FaceTime” for these iPhones. Grace, et al. v. Apple, Inc., 17-cv-00551-LHK, 2018 WL 4468825, at *1-*2 (N.D. Cal. Sept. 18, 2018). Specifically, Apple effectively disabled FaceTime for iPhone users with the iOS 6 operating system, requiring iPhone 4 and 4S users who wanted to continue to use FaceTime to upgrade to iOS 7, resulting in lost functionality, or purchase a new iPhone. Apple took these measures to save money on fees it was paying to a third party to enable users to use FaceTime and implemented these changes, that Plaintiffs characterized as a decision to “break” FaceTime for the iPhone 4 and 4S models, on April 16, 2014.Id. at *3.
On July 28, 2017, Judge Koh sustained Plaintiffs’ complaint, finding that Plaintiffs had Article III standing under California’s Unfair Competition Law, Cal. Bus. & Prof. Code §§ 17200, et seq. (the “UCL”) and trespass to chattels. Grace, et al. v. Apple, Inc., 17-cv-00551-LHK, 2017 WL 3232464 (N.D. Cal., July 29, 2017).
Plaintiffs sought to certify a class of “[a]ll owners of Apple iPhone 4 or Apple iPhone 4S devices in the United States who on April 16, 2014, had iOS 6 or earlier operating systems on their iPhone 4 or iPhone 4S devices,” or in the alternative “[a]ll owners of Apple iPhone 4 or Apple iPhone 4S devices in California who on April 16, 2014, had iOS 6 or earlier operating systems on their iPhone 4 or iPhone 4S devices.”
Apple opposed Plaintiffs’ motion for class certification making several arguments that resulted in noteworthy analysis from Judge Koh. First, Apple argued that Plaintiffs trespass to chattels and UCL claims could not meet Rule 23(b)(3)’s “predominance” element because the claims required individualized inquiries and could not meet the evidentiary standard under Comcast Corp. v. Behrend, 569 U.S. 27, 35 (2013), of showing “damages are susceptible of measurement across the entire class for purposes of Rule 23(b)(3).” Second, Apple argued that Rule 23(a)(3) typicality could not be demonstrated because the proposed class representative’s experiences were not typical of the class because of his personal use of the FaceTime feature, including his “jailbreaking” of one device. Third, Apple argued that Plaintiffs’ proposed nationwide class is barred under California’s choice of law test.
Judge Koh granted Plaintiffs’ motion for class certification, in part, and certified a California class excluding “jailbroken” iPhones.
Predominance: iPhone Wholesale Data Is a Reasonable Proxy to Show Lost Value
The most significant aspect of Judge Koh’s decision is that under Comcast Plaintiffs are not required to perfectly match economic data with their theory of liability, as long as their analysis is based on competent economic analysis that provides the best “feasible” proxy for market value. This decision is consistent with Ninth Circuit authority that holds, with respect to “average retail prices,” that “a precise average is unnecessary for class certification,” and “[a]t this stage, the question is only whether [an expert] has presented a workable method.” Lambert v. Nutraceutical Corp., 870 F.3d 1170, 1183–84 (9th Cir. 2017), cert. granted, 138 S. Ct. 2675 (2018).
Plaintiffs argued that predominance was met because they were challenging a uniform policy Apple made to “break” FaceTime: “Plaintiffs’ damages model bases class members’ damages on the diminution in the resale market value of affected iPhone 4 and iPhone 4S devices, which eliminates the need to base damages on class members’ personal experiences with the FaceTime Break (e.g. length of time without FaceTime access).” Id. at *10.
Apple contended individualized issues needed to be resolved to show class members suffered cognizable harm for their trespass to chattels and UCL causes of action, and because there was no uniformity in how class members use FaceTime or their iPhones, this showing could not be met.
For all causes of action, Judge Koh accepted Plaintiffs’ theory of harm, that they were injured in the diminution of value in their devices due to the decision to “break” the FaceTime feature.
With respect to trespass to chattels, Judge Koh ruled that because Plaintiffs’ theory was based on the diminution in value of the iPhone from the “break,” not on any length of deprivation, common impact could be shown by measuring the economic impact on each user’s iPhone: “Apple’s argument misconstrues Plaintiffs’ theory of liability. Plaintiffs are not arguing that Apple’s trespass deprived them ‘of the use of personal property for a substantial time’ but rather proceed under the alternative theory that the FaceTime Break “‘impaired the condition, quality, or value’ of their iPhones.” Id. at *10.
Judge Koh found that predominance existed with respect to the “unfairness” prong of the UCL because Plaintiffs relied on re-sale data from an electronics retailer to demonstrate that the value of all class members’ iPhones dropped after the “break.” Judge Koh’s analysis again emphasized that Plaintiffs were not seeking to recover based on their own individual experiences with their iPhones, but were seeking recovery for the diminished value of their property that was caused by the “break:” “Plaintiffs seek to measure how much this problem diminished the monetary value of class members’ iPhones’ by comparing Best Buy’s resale prices for the iPhone 4 and iPhone 4S before and after the FaceTime Break. This means Plaintiffs can measure class members’ harm through the devices’ decreased market value instead of a case-by-case determination of when class members upgraded to iOS 7 and what performance issues they experienced thereafter.” Id. at *11.
Judge Koh carefully scrutinized the opinion of Plaintiffs’ expert, Dr. Hastings, on the market value of the impacted iPhones. Plaintiffs’ expert used multivariable regression analysis to isolate the price impact of the “break” on iPhone wholesale resale data from millions of Best Buy sales, controlling for other variables that would affect the re-sale value, and found that there was a nearly 13% diminishment in the re-sale price. Id. at *12-*13.
Defendants sought to exclude Dr. Hastings’ analysis under Comcast because Dr. Hastings’ damages model did not match Plaintiffs’ theory of liability; in Apple’s view, Dr. Hastings erroneously relied on wholesale data rather than retail trade-in data and thus the model did not measure “only those damages attributable” to Plaintiffs’ theory of liability. Judge Koh concluded that this was a “close case,” but accepted Dr. Hastings’ conclusion that looking to wholesale data was the “only feasible way” to measure open market value, even if “it is possible that Plaintiffs’ model’s reliance on an indirect market measure has inflated class members’ damages.” Id. at *14. Judge Koh noted that “the Ninth Circuit has made clear that class certification does not require damages models based on flawless price averages.” Id. at *15. Defendants’ arguments ultimately went to the weight of Dr. Hastings’ opinions, and not its admissibility.
Judge Koh then rejected Apple’s additional arguments concerning predominance, ruling that Dr. Hastings’ opinion should not be excluded because he did not account for “jailbroken” or otherwise compromised iPhones because they accounted for less than 5% of iPhones, and that Plaintiffs’ diminution in value theory was consistent with the restitution remedy provided for by the UCL. Id. at *15-*16.
Typicality: Plaintiff’s Individual Use of FaceTime Not Relevant to the Value of the iPhone
Apple challenged typicality by showing one named plaintiff did not use FaceTime very much, and that his FaceTime usage was not shown to be interrupted substantially. Judge Koh rejected these arguments, rejecting Apple’s position that “71 days without FaceTime is ‘a mere momentary or theoretical deprivation’” and noting “Apple’s argument about deprivation length is only relevant if Plaintiffs base their injury on a deprivation theory of harm. However, Plaintiffs are instead proceeding under an impaired value theory, which means that Apple’s argument is beside the point.” Id. at *8.
Apple also attacked typicality by reference to evidence that one class representative had “jailbroken” one of his iPhones, a modification of the base programming designed to improve performance. Judge Koh agreed that “Potter’s claims based on his jailbroken 32 GB iPhone 4 are not typical of the class” because “[o]nly a small fraction of iPhone owners jailbreak their devices and one of the main reasons to jailbreak an iPhone is to alter its performance and functionality relative to a normal iPhone, i.e. to make it significantly different.” Id. Judge Koh sua sponte exercised her authority to exclude “jailbroken” iPhones from the Class Definition.
Nationwide Class: Choice of Law Rules Require Application of State’s Law where Harm is Felt, Not where Wrong Originated
Plaintiffs sought certification of a national class under California law because Apple made the decision to “break” FaceTime in California and attempted to apply California law nationally as the place of the wrongful activity. Apple demonstrated that state law varied with respect to trespass of chattels and consumer protection statutes; Apple’s position was that a conflicts analysis required that the states where the harm was felt should apply their law.
Judge Koh, applying California choice of law principles, concluded that “because the place of the wrong was the state in which each class member was exposed to the FaceTime Break each class member’s claims should be governed by the law of the state in which they were exposed to the FaceTime Break. Consequently, the Court will not certify a nationwide class because doing so would require application of all 50 states’ laws.” Id. at *23.
David M. Goldstein
Farmer Brownstein Jaeger & Goldstein LLP
In a decision that was recently unsealed, Judge Beth Labson Freeman granted a Rule 12(b)(6) motion to dismiss a putative “no poach” class action against LG Electronics and Samsung Electronics. Frost, et al. v. LG Electronics Inc., et al., No. 16-cv-5206-BLF, ECF No. 206 (N.D. Cal. July 9, 2018).
Plaintiffs filed separate class actions alleging that LG and Samsung entered into no poach agreements in Korea that affected the practices of their U.S. subsidiaries (LG USA and Samsung America). Plaintiff Frost, who was employed by LG USA, claim that he received no responses to at least ten employment applications he filed with Samsung companies. He also claimed that after a recruiter contacted him, the recruiter quickly followed up saying it was an error to do so: “I made a mistake! I’m not supposed to poach LG for Samsung!!! Sorry! The two companies have an agreement that they won’t steal each other’s employees. Sorry ‘bout that!” After a year of separation from LG, Samsung America hired him. Plaintiff Ra alleged he was employed by LG USA and received no responses to applications for open positions at Samsung America and other Samsung companies. A friend at Samsung told him Samsung and LG do not hire each other’s employees, and LG USA co-workers told him Samsung and LG have a “gentlemen’s agreement” in Korea not to hire each other’s employees, and the agreement “trickles down” to their U.S. subsidiaries. There also was an allegation that the head of LG’s human resources in India had stated that his company and Samsung have an “understanding” not to hire from each other without a gap of a year.
The lawsuits were related and plaintiffs filed a consolidated class action complaint. After the Court granted defendants’ motion to dismiss, plaintiffs filed a second amended complaint (SAC), asserting antitrust claims under the Sherman Act, the Cartwright Act, and the New Jersey Antitrust Act. All four defendants filed a motion to dismiss under Rule 12(b)(6) arguing the SAC failed to state a claim because it did not plausibly allege an anticompetitive no poach agreement between the Korean parent companies, LG and Samsung.
The Court immediately turned to Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 556 (2007), to review the now-familiar pleading standards for antitrust claims to survive a motion to dismiss. It then turned to the Ninth Circuit’s test that the plaintiffs’ allegations must “answer the basic questions: who, did what, to whom (or with whom), where, and when?” Kendall v. Visa U.S.A., Inc., 518 F.3d 1042, 1047 (9th Cir. 2008). The Court explained that plaintiffs must plead evidentiary facts regarding the alleged conspiracy through either direct evidence of an agreement or circumstantial evidence in the form of parallel conduct and “plus factors.”
The Court found that plaintiffs’ allegations failed to meet these standards. Taken together, the allegations would require the Court to infer an agreement between the Korean parent companies. In addition, the Court agreed with defendants that the SAC did “not contain any evidentiary facts regarding the ‘specific time, place or person’ involved in the alleged agreement as required under Kendall.” (Emphasis in original.) The allegations were too imprecise, because the experience of employees in the United States and India did not give rise to a plausible claim that executives at LG and Samsung in Korea entered into a collusive agreement. The Court specifically rejected plaintiffs’ allegations regarding how Korean chaebols operate as a basis to find a conspiracy. The Court said it carefully considered plaintiffs’ allegations, but found that they did not contain the kind of more specific evidentiary allegations that were in the complaints in the prominent no poach cases of In re High-Tech Employee Antitrust Litigation, 856 F. Supp. 2d (N.D. Cal. 2012), and In re Animation Workers Antitrust Litigation, 123 F. Supp. 3d 1175 (N.D. Cal. 2015).
The Court granted the defendants’ motion without leave to amend, and plaintiffs have filed a notice of appeal.
Pritzker Levine LLP
On August 28, 2018, the Third Circuit Court of Appeals in LifeWatch Services, Inc. v. Highmark Inc., et al., case No. 17-1990, 2018 WL 4087882, reversed the Eastern District of Pennsylvania’s dismissal of an antitrust action against a health insurance association and its member insurance plan administrators arising out of their denial of coverage for telemetry monitors. The case was also remanded for further analysis of whether Plaintiff’s claims would still fail under the McCarran-Ferguson Act, which exempts private insurers from federal antitrust liability in certain circumstances, an issue the District Court did not reach.
Plaintiff LifeWatch alleged that it was shut out of the market for the medical device it sells as a result of an agreement entered into by the defendants, an insurance association, Blue Cross Blue Shield Association (“Association”), and five of its member insurance plans, in violation of § 1 of the Sherman Act and the Clayton Act. The District Court dismissed LifeWatch’s suit pursuant to Defendants’ 12(b)(6) motion on the grounds that LifeWatch failed to allege anticompetitive effects, and therefore failed to establish the restraint on trade was unreasonable. 2018 WL 4087882, at *3.
LifeWatch is a manufacturer of telemetry monitors, an outpatient medical device that monitors cardiac activity. There are other types of cardiac monitors with which telemetry monitors compete, including but not limited to event monitors, Holter monitors, and insertable monitors, though they vary widely in price. While telemetry monitors are about three times more expensive than event monitors, they capture up to 30 days of cardiac activity and automatically transmit the data to an analyst center, while event monitors record a much shorter window of data (in some case no more than a minute), and the patient is required to actively transmit the data. Insertable monitors, which are surgically implanted, are the most expensive, costing eight to ten times more than event monitors. 2018 WL 4087882, at *1.
Defendant Association and its members were alleged to be the largest commercial health insurance group in the country, collectively insuring 105 million Americans, with a national network that covers 96% of hospitals and 92% of doctors. The Association, which is not an insurer itself, owns the right to the Blue Cross and Blue Shield trademarks and trade names, and licenses the rights to 36 insurers nationwide. Five of those member plans are named as defendants in this action (the “Blue Plans”).
The Association maintains a “model medical policy” that recommends to the Blue Plans which treatments, devices, or services to cover. Id., at *2. For more than a decade, the model policy has recommended against covering prescriptions for telemetry monitors, claiming that they are not “medical necessary” or that they are “investigational”, despite multiple medical studies and at least 20 patient coverage appeals where the review board determined that telemetry monitors were a standard of care or clinically necessary. Despite these review board decisions and studies, the Association’s model policy has been adopted in near lockstep by all the member Blue Plans. Yet, Medicare, Medicaid, and other private insurers, including Aetna, cover telemetry monitors. Id., at *2. As a result of the Association’s and the Blue Plans’ refusal to cover the telemetry monitors, LifeWatch claims its sales and cardiac monitoring treatment have suffered. Id.
Defendants moved to dismiss on the grounds that Plaintiff failed to allege either agreement or anticompetitive effects in the relevant product market, that LifeWatch lacks antitrust standing because it could not show antitrust injury, and that Blue Cross’s telemetry monitor coverage decisions are immune from antitrust challenge under the McCarran-Ferguson Act. The Eastern District of Pennsylvania dismissed for failing to allege anticompetitive effects, and therefore failing to establish the restraint was unreasonable. Id., at *3.
The District Court found that because each Blue Plan “treats all telemetry providers equally” LifeWatch failed to alleged “competition-reducing” conduct, and that the Defendants’ refusal to purchase any telemetry device is not an antitrust violation, but rather a legal exercise of Defendants’ monopsony power. Id., at *3, citing underlying decision, 248 F.Supp.3d 641, 650 (E.D.Pa. 2017). The Court also suggested in dicta that LifeWatch failed to allege an agreement, believing that the Plans could have independently decided not to permit coverage. It did not explicitly reach antitrust standing or the application of the McCarron-Ferguson Act. Id.
In reversing, the Third Circuit found that LifeWatch pled sufficient circumstantial evidence of agreement; that Plaintiff had alleged both parallel conduct and the “plus factor” required when relying upon circumstantial evidence of an agreement. Id., at *4. The “parallel conduct” requirement was met because LifeWatch alleged that the Association’s model policy recommended that the Blue Plans deny coverage for telemetry monitors, and, as result the Blue Plans adopted the policy in near total uniformity, using similar or identical language in their denials (which LifeWatch dubbed “the Uniformity Rule”). Id., at *4. The Court found that the Association’s argument that the model policy explicitly disclaims that the Plans are bound to follow it misunderstood the nature of the alleged agreement: LifeWatch instead claimed that the Blue Plans’ agreements that they would substantially comply with the model policy, which was then enforced by the Association through audits and sanctions, including losing the right to use the Blue Cross name. Id., at *5 (emphasis in original). These allegations in the Complaint, including of an example of one Plan being pressured to conform to the model policy, satisfied the plus factor. Id., at *6.
B. Unreasonable Restraint of Trade
LifeWatch asserted that the Blue Plans engaged in a horizontal concerted refusal to deal; therefore, the parties agreed that the rule of reason framework applied. Id., at *7. LifeWatch could satisfy the unreasonable-restraint element in two ways: by pleading actual detrimental effects on competition, such as reduced output, increased prices, or decreased quality in the relevant market, or it can plead that the Defendants have market power, plus some evidence that the challenged restraint harms competition. Id., at *7 (internal citations omitted).
First, the Third Circuit analyzed the relevant market. While LifeWatch had plead the existence of both national and regional markets for the sale of health insurance plans, on appeal it only asserted a national market, and so the court focused its inquiry there. Id., at *8. While the Complaint explained that the Blue Plans operate nationwide, Defendants argued that telemetry monitors do not compete in the same market as other cardiac monitors, such as the Holter, event, and insertable monitors. Id. While the District Court’s opinion did not explicitly reject LifeWatch’s market theory that all cardiac monitors compete with each other, the Third Circuit found that it implicitly rejected it. Id. The Third Circuit disagreed, finding that differences in monitors did not mean that they did not compete for the same customers, likening it to the markets for copiers, computers, and automobiles Id., at *9.
The Third Circuit also found a “more fundamental problem” with the District Court’s analysis: that in a buyer-side conspiracy case, the unreasonable-restraint analysis is whether the defendants’ purchasing power is constrained by competition from other purchasers in the relevant market; the interchangeabilty that matters is for purchasers of outpatient monitors, not the sellers, as the District Court suggested. Id., at *9 (emphasis in original). LifeWatch’s allegations that health insurers are the gatekeepers in controlling patient purchases, and that other insurers like Aetna, Medicaid, etc., did fund purchases of outpatient cardiac monitors was found to be sufficient to plead a plausible unreasonable restraint on trade.
Finding a proper market definition, the Third Circuit next found LifeWatch had adequately and plausibly alleged anticompetitive effects: that the denial of coverage harmed consumers by reducing demand for and output of more effective devices, interfering with a patient’s choice of treatment, and reducing the quality of cardiac monitors in general.. Disagreeing with the District Court, the Third Circuit found that the relevant choice wasn’t between different telemetry monitors, but between different types of cardiac monitors in the marketplace. The Plans’ refusal to fund telemetry monitor prescriptions while funding comparable treatment with other monitors, induced doctors and insureds alike to choose cardiac monitor devices other than telemetry monitors and this was sufficient to support a claim of anticompetitive effects at this stage. Id., at *10.
C. Antitrust Standing
The Court laid out the five factors for finding antitrust standing under the Clayton Act, relying on In re. Lower Lake Erie Iron Ore Antitrust Litig., 998 F.2d 1144, 1165-66 (3d Cir. 19993). The parties did not dispute that LifeWatch had pled four of the factors: a causal connection between the violation and the harm to the plaintiff and the intent by the defendant; the directness of the injury; the existence of more direct victims of the alleged antitrust violations; and the potential for duplicative recovery, but were in disagreement as to whether Plaintiff had plausibly alleged antitrust injury. Id., at *11. The Association argued that the intervening factors of each Plan’s independent ability to deny coverage, a doctor’s choice not to prescribe a telemetry device, and a patient’s desire for alternative treatments, broke the causal chain. Id.
The Court of Appeal was not persuaded. The Complaint alleged that the Plans’ near-universal decision to deny coverage would not have occurred without their agreement and the Association’s enforcement via audits and sanctions. Id., at *12. LifeWatch also alleged doctors were deterred from prescribing telemetry monitors because of prior denials and the hassle of not knowing if a patient’s insurer will cover the device, and that the Uniformity Rule insulated the Plans from demand for telemetry treatment. These facts sufficiently alleged a causal link between Plaintiff’s injury (lost profits) and the Plans’ denial of coverage. Id. This injury, the Third Circuit held, is “of the type” that antitrust laws were meant to prevent. Id.
D. McCarran-Ferguson Act
Because it dismissed the case on other grounds, the District Court did not analyze whether Defendants had shown it was exempt from antitrust liability under the Act. The Third Circuit remanded the issue to the District Court.
While many of the facts are unique to how the Association and the Blue Cross Plans operated in the marketplace and with one another, the LifeWatch opinion provides helpful insight in defining a market in alleging a buyer-side horizontal conspiracy.
O’Melveny & Myers LLP
In Naperville Smart Meter Awareness v. City of Naperville, the Seventh Circuit affirmed the order of Judge John Z. Lee of the Northern District of Illinois (Eastern Division), denying a consumer privacy rights organization leave to amend their complaint against the city of Naperville, Illinois for engaging in an allegedly unreasonable search and seizure of its residents’ private data in the form of electric meter monitoring. 900 F.3d 521 (2018). The Seventh Circuit concluded that while the city was conducting a “search” by collecting and monitoring residents’ smart meter data, that search is a “reasonable” one under relevant Fourth Amendment law.
In January 2012, the Naperville Department of Public Utilities—Electric (DPU-E) began replacing residents’ electricity meters with smart meters. Naperville Smart Meter Awareness v. City of Naperville, 114 F. Supp. 3d 606, 609 (2015). The replacement project was part of the city’s “Smart Grid Initiative,” which was funded partly by the federal Department of Energy’s money from the American Recovery and Reinvestment Act of 2009. Id. The smart meters that were installed had wireless radio transmitters that can send usage data to network access points in different neighborhoods; the DPU-E would collect the data from there. Id. The smart meters are also capable of measuring a home’s aggregate electricity usage in intervals of fifteen minutes, meaning that the DPU-E would be gathering “data consisting of ‘granular, fine-grained, high-frequency type of energy usage measurements” . . . totaling to ‘over thousands of intervals per month.’” Id.
Because so much data is being collected from residents’ homes, it is possible for someone with access to that data to make fairly accurate inferences about what the residents are doing, because of the distinct “load signatures” that different electronic devices have. As the Seventh Circuit explained, a refrigerator, television, respirator, and indoor grow light all draw power differently, so their usage of power can be distinguished and researchers can predict what appliances are being used in a home, and when. 900 F.3d at 524.
In addition, Naperville residents do not have a choice about whether or not to get a power meter that collects this kind of information. They can request (and pay an extra fee for) a meter that does not have the wireless transmitter enabled, but the meter will still collect the same data – it must just be manually retrieved. Id. at n.1. As a result, a group of Naperville residents formed the Naperville Smart Meter Awareness (NSMA) organization and sued the city, alleging that Naperville’s collection of smart meter data constitutes an unreasonable search and seizure under the Fourth Amendment as well as the analogue provision in Illinois’ Constitution. 114 F. Supp. 3d at 610. After the court dismissed in part two earlier versions of NSMA’s complaint, the city opposed NSMA’s motion to file its third amended complaint.
The district court denied the motion with prejudice. The court concluded that NSMA had failed to state a cognizable Fourth Amendment claim, because it had not alleged that Naperville was “actually collecting and using the data in a way that would amount to an unreasonable search or invasion of privacy.” Id. at 612. Rather, NSMA’s allegations were no more than speculation that the city might use the information from the smart meters unconstitutionally. In the court’s view, regardless of the potential of the smart meters, NSMA had not alleged that the meters were “relaying detailed information beyond aggregate data about members’ electricity usage to the City and that the City is disaggregating the data to analyze the private lives of its residents.” Id. at 613. Therefore, there was no Fourth Amendment (or Illinois Constitution) claim.
Arguments on Appeal
On appeal, NSMA pointed to the special protections for privacy in the home conferred by the Fourth Amendment, and argued that this case implicated those concerns. 2017 WL 817301, at *18. Moreover, NSMA contended that it pleaded, and would have proven, if only it had been allowed to proceed past the pleadings, it would have shown the “significant risks created by the massive, ongoing data collection integral to the City’s smart-meter program.” Id. at *21-*22. In addition, NSMA argued that the collection of such data opened the City and its citizens up to other privacy risks, such as those that arise when personal data is shared with third parties. Id. at *24-*25. Throughout its brief, NSMA relied heavily on the Supreme Court’s decision in Kyllo v. United States, 533 U.S. 27 (2001), in which the defendant had been surveilled by the police using infrared technology, which revealed that he was using many grow lights to grow his marijuana plants. Kyllo emphasized the sanctity of the home and a person’s right to be free of unwanted governmental intrusion there.
NSMA was supported on appeal by Electronic Frontier Foundation (EFF) and Privacy International (PI), who co-authored an amicus brief. 2017 WL 995490. Their brief concentrated on carefully spelling out (1) why the data collected by the smart meters is highly intimate and can reveal the particulars of what people are doing in the privacy of their own homes, and (2) pointing to case law establishing that such information is protected under the Fourth Amendment. EFF and PI argued that under Kyllo, “all details of the home are intimate details,” so the smart meter information clearly qualifies; EFF and PI noted that, in fact, “smart meter data can be used to infer a far more detailed picture of the interior of a home and of the lives of its inhabitants than the grainy thermal images in Kyllo,” making the smart meter data arguably even more sensitive. Id. at *15-*16. EFF and PI also contended that people have a reasonable expectation of privacy as to their electronic device usage, and cited studies showing “consumer concern over the privacy implications of smart meter data.” Id. at *19-*20.
In its response, Naperville argued that the Fourth Amendment is not implicated at all by smart meters, because it is “meaningless data” by itself and requires disaggregation and analysis to understand anything more about the residents of homes with the meters. 2017 WL 2311912, at *11. Naperville asserted that Kyllo and similar Supreme Court cases cited by NSMA, EFF and PI were not controlling because of their very distinct factual contexts. Id. at *12. The city also took the position that not only were residents voluntarily using the smart meter (never mind that they could not get electricity without it), measurement of electricity usage is not “surveillance,” and in any case residents lack a reasonable expectation of privacy in such information because they are handing it over to a third party (the “third-party doctrine,” which has been applied in other cases, including the Sixth Circuit’s United States v. Carpenter, 819 F.3d 880 (2016), which was later overturned by the Supreme Court). Id. at *17-*21.
The Seventh Circuit’s Analysis
Reaching more deeply into the foundations of Fourth Amendment rights, and into Supreme Court case law on unreasonable searches, than the district court did, the Seventh Circuit began by agreeing with NSMA and amici that Kyllo was an important precedent. 900 F.3d at 525-26. The Seventh Circuit also agreed with NSMA and amici that the data being gathered here “is at least as rich as that found to be a search in Kyllo.” Id. at 526. The court noted that the data being collected by Naperville “can be used to draw the exact inference that troubled the Court in Kyllo,” with even more certainty and specificity. Id. Because this kind of technology is not in general use, the Seventh Circuit had no difficulty finding that Naperville was conducting a “search” of residents’ homes via the smart meters. Id. at 527. The Seventh Circuit also easily rejected the city’s third-party doctrine argument, noting that no third party is involved, and Naperville residents have no real “choice” about whether to use the smart meters. Id.
However, the Seventh Circuit then went on to assess the reasonableness of the search, and here the city prevailed. In the court’s view, data collection from an electricity meter is “far less invasive than the prototypical Fourth Amendment search of a home,” and is conducted without any prosecutorial intent. Id. at 528. The court distinguished this case from Camara v. Municipal Court, a 1967 Supreme Court case holding that a warrantless, administrative home inspection violated the Fourth Amendment, on the grounds that the smart meter data collection revealed details without requiring any physical entry into the home, so there would be no threat to the residents’ security. Id., discussing 387 U.S. 523, 530-31. The court went on to say that the government has a strong interest in using smart meters and collecting this kind of data, because they allow utilities to restore services more quickly after outages, permit time-based pricing, and can reduce utilities’ labor costs, since home visits for meter reading and repair can be less frequent. Id. at 528-29. But the court emphasized that its conclusion was dependent on its assumption that the search was (1) unrelated to law enforcement, (2) not very invasive, and (3) poses minimal risk to residents of criminal consequences. Id. at 529.
The Naperville decision comes on the heels of the Supreme Court’s blockbuster opinion in Carpenter v. United States, in which the Court ruled that a warrant is required for police to access the detailed geolocation information generated by a cellphone’s communication with cell towers. 138 S.Ct. 2206 (2018). The Seventh Circuit took care to distinguish this case from Carpenter, reasoning, as noted, that law enforcement was not involved in the meter-reading, and excessive electricity use is not a crime in Naperville, so residents are not subject to criminal or other penalties based on the search of their meters. 900 F.3d at 529. Still, the court’s view that the extremely detailed information obtainable from the meters is less invasive than police or others walking through a person’s house is somewhat surprising, and points to future struggles for privacy advocates. On this reasoning, a search of a cell phone by a wireless provider or internet service provider is hardly “invasive,” yet everyone knows how much intimate information is recorded on a cell phone – more than is in a house, even. And although the Seventh Circuit attempted to cabin the opinion to this particular context, it is hard not to see the context as a slippery slope: yes, the DPU-E was not cooperating with law enforcement or doing any detailed analysis of the data yet, but they easily might start. And, at least as important, the data is being harvested and stored somewhere: how secure is it? As more and more corners of our lives are digitized and transmitted wirelessly to government offices, utilities, manufacturers, service providers, and advertisers, the lines drawn in prior Fourth Amendment caselaw will become more and more hazy and squiggly, until they eventually need to be redrawn altogether.
Ian L. Papendick
Kevin B. Goldstein
Dana L. Cook-Milligan
Winston & Strawn LLP
In Supreme Auto Transport, LLC v. Arcelor Mittal USA, Inc., 902 F.3d 735 (7th Cir. 2018), the Seventh Circuit affirmed the dismissal of antitrust conspiracy claims brought under the laws of 21 states, including the Cartwright Act and UCL, as time barred and, in the alternative, because the operative complaint did not plausibly plead a causal connection between the alleged conspiracy and indirect purchaser plaintiffs’ injuries. The plaintiffs’ claims were affirmed to have been time barred because the scope of the products at issue in the action had materially changed between the original complaint and the amended complaint, which was filed after the limitations period had run. The causation issue originally came before the Seventh Circuit as a question of antitrust standing under Associated General Contractors of California Inc. v. California State Council of Carpenters, 459 U.S. 519 (1983) and its progeny. However, in reaction to the Supreme Court’s clarification of what is a true “standing” issue in Lexmark International, Inc. v. Static Control Components, Inc., 572 U.S. 118 (2014), the Seventh Circuit reframed how it would analyze what has long been termed “antitrust standing.” As a result, the Seventh Circuit announced that it would no longer refer to questions of “antitrust standing” and would instead discuss issues like those raised in this case through the lens of proximate cause and whether the requirements of the particular statutes at issue are met.
This putative indirect purchaser class action alleged an antitrust conspiracy in the domestic steel industry. Supreme Auto Transport, 902 F.3d at 737. The plaintiffs claimed that the eight defendant domestic steel producers—which allegedly accounted for 80-85% of steel production in the United States—colluded to decrease steel output in order to increase steel prices nationwide. Id. at 738. The original complaint in the action was filed in 2008, and a significantly amended complaint was filed in 2016.
The amended complaint at issue in the Seventh Circuit’s opinion was brought by sixteen plaintiffs from twelve states that alleged that they purchased “one or more steel products containing steel purchased from one or more of the Defendants during the Class period.” Id. at 740. Those sixteen plaintiffs sought to represent a class asserting claims arising from “state-law antitrust injuries in 21 states, consumer-protection injuries in 19 states, and unjust enrichment injuries in 48 states and the District of Columbia.” Id. The plaintiffs’ claims included causes of action under California’s Cartwright Act, Unfair Competition Law, and for unjust enrichment under California law.
Although the original complaint defined the “steel products” at issue to include “any consumer steel product including but not limited to produced flat steel sheets and coils; galvanized steel products; tin mill products; steel plates; steel beams, rails and other structural shapes; steel bars and rods; steel wire and wire rod; steel pipes and other tubular products; and a variety of other products derived from raw steel,” this definition was changed in the amended complaint. The amended product scope that was considered by the district court when it dismissed the amended complaint, and by the Seventh Circuit, defined “steel products” to include “any consumer steel product for end use and not for resale, including clothes washers, clothes dryers, refrigerators, freezers, dishwashers, microwave ovens[,] regular ovens, automobiles, semi-tractor trailers, farm and construction equipment, room air conditioner units, hot water heaters, snow blowers, barbeque grills, lawn mowers, and reinforcing bars used in patios, driveways, swimming pools and sidewalks.” Id. Thus, the putative class would have included all purchasers of any consumer product containing steel in the relevant states.
The defendants moved to dismiss the amended complaint, arguing that the plaintiffs’ alleged injuries were too remote to establish a right to recover. Id. In particular, they argued that under the AGC framework, Plaintiffs’ alleged injury was too remote, damages too speculative, and the alleged improper conduct not likely to be targeted to downstream purchasers. Supreme Auto Transport LLC v. Arcelor Mittal, 238 F. Supp. 3d 1032 (N.D. Ill. 2017). The defendants further argued that the claims in the amended complaint were time barred because they alleged a new set of injuries and thus did not relate back to the original complaint. Supreme Auto Transport, 2018 WL 4224426, at 740. The District Court agreed, ruling that the claims were time barred and, in the alternative, were too remote for recovery. Id.
Plaintiffs appealed, and the Seventh Circuit, in an opinion authored by Chief Judge Wood, affirmed the District Court’s decision on both grounds.
The Seventh Circuit began its analysis by addressing the statute of limitations argument, and although the it affirmed on statute of limitations grounds, it further opined on the remoteness of plaintiffs’ claims because the Court “recognize[d] that [it does] not necessarily have the last word.” Id. at 742. The Court thus thought it “prudent also to say a word about this basis for the district court’s decision.” Id.
The Seventh Circuit Affirmed that Plaintiffs’ Amended Complaint is Time Barred by the Relevant Statutes of Limitations
Considering the argument that the plaintiffs’ amended complaint was time-barred, the Seventh Circuit observed that the plaintiffs conceded that the April 2016 amended complaint fell outside the relevant statutes of limitation, the longest of which would have expired in 2014. Id. at 740. Thus, the amended complaint would be time barred unless, as the plaintiffs argued, it related back to the original complaint filed in 2008. The Court noted that an amended pleading relates back for purposes of the statute of limitations analysis if “the amendment asserts a claim or defense that arose out of the conduct, transaction, or occurrence set out—or attempted to be set out—in the original pleading.” Id. at 741 (citing Fed R. Civ. P. 15(c)(1)(B)). Under Seventh Circuit precedent, the court looks to whether the original complaint “gave the defendant enough notice of the nature and scope of the plaintiff’s claim that he shouldn’t have been surprised by the amplification of the allegations of the original complaint in the amended one.” Id. (quoting Santamarina v. Sears, Roebuck & Co., 466 F.3d 570, 573 (7th Cir. 2006)).
The District Court held that the amended complaint did not relate back to the original complaint because it did not satisfy the fair-notice requirement under Seventh Circuit authority because “the transactions at issue in the first complaint (the indirect purchase of steel pipes, tubing, and sheets) were wholly distinct from the transactions at issue in the amended complaint (the purchase of washing machines, cars, swimming pools, and the like).” Id. The Seventh Circuit agreed, finding that the changed definition of steel products between the original complaint and amended complaint meant that a reasonable defendant was unlikely to have read the original complaint and imagine that the plaintiffs were including end-use household and commercial goods. Id. Such a reading, the Seventh Circuit further noted, “would transform nearly every person in the country into a potential class member.” Id.
The Seventh Circuit acknowledged the plaintiffs’ arguments that the original complaint definition of steel products included “any” product “derived from raw steel,” and that the list was intended to be illustrative and not exhaustive. Id. But the Seventh Circuit opined that even if the list was meant to be illustrative, the Court had to consider “what general category the list was designed to illustrate.” Id. Under Supreme Court precedent, an illustrative list is meant to “indicate that a definition includes only those objects that are similar to the objects in the list.” Id. (citing Begay v. United States, 553 U.S. 137, 142 (2008)). Further, the Court noted, the plaintiffs gave no indication in the years between filing its original complaint and the amended complaint that its suit included products other than mill output (such as steel pipes, tubing and sheets). In fact, the original complaint and other filings referred only to mill output and the definition seemed to be taken from another complaint in a related direct purchaser action, which was exclusively about mill output. Id. at 742. As such, the Seventh Circuit disagreed that even viewing this as an illustrative list would relate the amended complaint back to the original complaint. Id.
Finally, the Seventh Circuit disagreed with Plaintiffs’ argument that the statute of limitations should have been tolled under American Pipe & Construction Co. v. Utah, 414 U.S. 538, 94 S.Ct. 756 (1974), because the newly named putative class representatives or putative class members added under the scope of the amended complaint were not “asserted members of the class” as defined by the original complaint, nor were their claims included in the original complaint. Id. (quoting American Pipe, 414 U.S. at 553).
The District Court held that the amended complaint did not demonstrate that the plaintiffs had antitrust standing under the AGC test, because the plaintiffs’ injury was too remote, their damages too speculative, and the alleged improper conduct was not likely to be targeted toward downstream purchasers. Supreme Auto Transport, 238 F. Supp. at 1038-41.
The Seventh Circuit began its analysis by explaining that proximate causation as a general matter is “an essential element that plaintiffs must prove in order to succeed on any of their claims” and that the purpose of this analysis “is to avoid speculative recovery by requiring a direct relation between the plaintiff’s injury and the defendant’s behavior.” Supreme Auto Transport, 902 F.3d at 743. The Seventh Circuit further commented that while this proximate causation requirement is often referred to as “antitrust standing” in the context of an antitrust litigation, it in fact “has nothing to do with a plaintiff’s standing to sue under Article III of the U.S. Constitution (which requires only but-for causation, an injury-in-fact, and redressability).” Id. (citing Greater Rockford Energy & Tech. Corp. v. Shell Oil Co., 998 F.2d 391, 395 & n.7 (7th Cir. 1993); Associated Gen. Contractors of Cal. Inc. v. Cal. State Council of Carpenters, 459 U.S. 519, 535-43 (1983)). It further noted that the Supreme Court clarified in Lexmark International, Inc. v. Static Control Components, Inc., 572 U.S. 118 (2014), “that the considerations often referred under the rubric of ‘prudential standing’ are nothing more or less than substantive questions about the coverage of a statute.” Id. The Seventh Circuit thus “eschew[ed] the term ‘antitrust standing’” and decided to “speak only of the requirements to bring a case under the particular statutes involved.” Id.
The Seventh Circuit recognized that federal law generally limits who may recover as a plaintiff to those potentially injured parties that directly purchased an allegedly price-fixed product from an alleged conspirator. Id. at 743 (citing Illinois Brick Co. v. Illinois, 431 U.S. 720, 729-30 (1977)). However, twenty-one of the states under which the plaintiffs brought claims in their amended complaint were “Illinois Brick repealer states,” which have under state law rejected the strict “direct purchaser only” requirement that would bar the claims of downstream purchasers like the plaintiffs. Id.
However, the Seventh Circuit explained that the mere fact that these states allow indirect purchaser claims did not necessarily solve the plaintiffs’ remoteness problem. Although the plaintiffs argued that the laws in Illinois Brick repealer states allow all indirect purchaser suits to go forward “no matter how far removed the purchasers are from the production process and no matter how speculative the damages award would be,” the Seventh Circuit disagreed. Id. at 744. Contrary to the plaintiffs’ expansive and categorical reading of the relevant states’ laws, the Court found that the fact that some states permit indirect purchaser claims under their law does not mean that proximate causation is irrelevant to the analysis of the viability of claims under those laws. Id.
In affirming the District Court’s dismissal on remoteness grounds, the Seventh Circuit compared the product scope alleged in the plaintiffs’ original complaint against the product scope in the amended complaint at issue. In contrast to the expansive definition of “steel products” in the amended complaint, the Seventh Circuit observed that “many if not all Illinois Brick repealer states would have allowed Supreme Auto’s original complaint to go forward.” Id. The amended complaint, in contrast, “alleges that plaintiffs purchased steel only insofar as it was one among many components of other more complex products, all of which have gone through numerous manufacturing alterations and lines of distribution.” Id. As such, the Court explained that it could not imagine a circumstance under which the effect of the alleged overcharge could be adequately traced through the complex supply and production chains at issue. Id. The Court concluded that the District Court properly ruled that “the claims asserted . . . were too remote to support a claim under the different state laws plaintiffs invoked.” Id.
The Supreme Court has in recent years clarified that courts should look to the relevant laws when considering standing and jurisdictional issues, rather than resting on “prudential” considerations. See Lexmark Int’l., 572 U.S. 118; Arbaugh v. Y & H Corp., 546 U.S. 500 (2006). The Seventh Circuit appears to be the first circuit court to apply this message to abandon that long-used term “antitrust standing” in favor of a more fundamental approach that looks at the proximate causation element of antitrust and consumer protection causes of action.
In indirect purchaser cases, litigants have historically fought about whether particular states apply the AGC framework for antitrust standing at all. Because the Seventh Circuit decided to “eschew the term ‘antitrust standing’ and [instead] speak only of the requirements to bring a case under the particular statutes involved,” Supreme Auto Transport, 902 F.3d at 743, its analysis may be particularly useful in assessing the viability of indirect purchaser claims under the antitrust and consumer protection laws of states that do not completely adopt federal precedent, such as California. See, e.g., Aryeh v. Canon Bus. Solutions, Inc., 55 Cal. 4th 1185 (2013).
The Seventh Circuit’s analysis is also a useful example of the application of the relation-back doctrine and American Pipe tolling in instances where the product scope in the definition of the putative class changes in an amended complaint. This decision underscores that when there are material changes in the descriptions of product scope between pleadings, catch-all “including but not limited to” language is not sufficient to save claims from being time barred.
Mark F. Ram
Cotchett, Pitre & McCarthy, LLP
The EpiPen® is a disposable epinephrine auto-injector (“EAI”) that delivers epinephrine to treat anaphylaxis, a life-threatening allergic reaction. In 2007, Mylan NV acquired the right to market and distribute the EpiPen. Since 2009, Mylan’s share of the EAI market—through the EpiPen—has exceeded 90%; in 2012, Mylan’s market share was almost 100%. As has been widely reported, Mylan increased the EpiPen’s price by more than 600% while the cost of the EpiPen’s dose of epinephrine has remained about $1. In 2007, the EpiPen cost $100; by 2016, Mylan was charging more than $600.
In In re: EpiPen (Epinephrine Injection Sales Practices & Antitrust Litig., No. 17-md-2785-DDC-TJJ (D. Kan.) (“EpiPen”), a putative class of end-payor plaintiffs allege that Mylan was able to achieve this price increase through anticompetitive means. Remarkable about EpiPen is the breadth of plaintiffs’ antitrust claims. Specifically, plaintiffs allege that (1) Mylan’s bundling of EpiPens in packages of two constitutes an unlawful tying arrangement; (2) Mylan entered into unlawful exclusive dealing arrangements with Pharmacy Benefit Managers (PBMs); (3) Mylan entered into unlawful exclusive dealing arrangements with schools; (4) Mylan and Pfizer entered into unlawful “pay-for-delay” settlements; (5) Mylan made a “sham” Citizen Petition to the FDA to delay generic competition; and (6) Mylan made fraudulent statements about competitors.
On August 20, 2018, U.S. District Judge Daniel D. Crabtree of the District of Kansas issued a 128-page order upholding plaintiffs’ claims of anticompetitive practices. EpiPen, 2018 WL 3973153 (D. Kan. Aug. 20, 2018). This note will focus on two of plaintiffs’ antitrust claims.
Tying one EpiPen to another.
From 1987 to 2011, the EpiPen was sold one at a time in the U.S. without incident. Beginning in 2011, Mylan began selling EpiPens two at a time in a package known as a “2-Pak”; EpiPens were no longer available individually in the United States. Plaintiffs allege that nothing changed in 2011 that required Mylan to sell EpiPens in a pair. According to plaintiffs, there is no medical reason to force customers to purchase a 2-Pak instead of a single EpiPen. Indeed, EpiPens are sold individually in every country where EpiPens are sold other than the United States. Id. at *7. Plaintiffs allege that requiring customers to purchase two EpiPens at a time constitutes an unlawful tying arrangement.
Mylan argued that plaintiffs failed to allege a plausible tying claim because they did not allege the existence of two distinct products. Mylan posited that because plaintiffs premised their tying claim on the EpiPen 2-Pak (i.e., selling two EpiPen devices in one package), plaintiffs failed to allege an unlawful tying arrangement because it involves selling two identical products.
In analyzing the parties’ arguments, the EpiPen court explained, “[t]ying is an arrangement involving the sale of ‘two distinct products or services as a package.’” Id. at *10 (quoting Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 33 (1984) (Brennan, J., concurring). The “essential characteristic of an invalid tying arrangement lies in the seller’s exploitation of its control over the tying product to force the buyer into the purchase of a tied product that the buyer either did not want at all, or might have preferred to purchase elsewhere on different terms.” Id. at *10 (quoting Jefferson Parish, 466 U.S. at 12). But “a tying arrangement cannot exist unless two separate product markets have been linked.” Id. (quoting Jefferson Parish, 466 U.S. at 21). And “the question whether one or two products are involved turns not on the functional relation between them, but rather on the character of the demand for the two items.’ Id. at 19”. Id. at *10.
The plaintiffs responded that “they have alleged a tying arrangement involving two separate product markets—one for the primary EAI device, and the other for a ‘spare’ (or ‘back-up’) EAI device.” Id. at *11. This argument was supported by the fact that prior to 2011, there was “sufficient independent demand for some patients to either not purchase a second EpiPen at all or to purchase an EpiPen and a cheaper, alternative back-up.” Id.
The court agreed with plaintiffs’ response, concluding that plaintiffs allege “sufficient consumer demand in the U.S. to purchase a primary EAI device separately from a back-up device or none at all so that it is efficient for a firm to provide one separately from the other.” Id. at *11 (quoting Eastman Kodak Co. v. Image Tech. Servs., Inc., 504 U.S. 451, 456 (1992) (internal quotation and alteration omitted).
The EpiPen court’s conclusion here is notable because it was a matter of first impression. As the court remarked, “[t]he parties do not cite, and the court’s research has not revealed, any tying cases involving identical products with different and distinct uses—what the class plaintiffs allege here.” Id. at *11.
Sham Citizen Petition.
An FDA Citizen Petition provides the public a means to present safety concerns to the FDA. Plaintiffs allege that Mylan used the FDA Citizen Petition process to (1) delay Teva’s entry into the EAI market and (2) prevent Teva’s EAI product from competing with the EpiPen. Thus, on January 16, 2015, Mylan filed a Citizen Petition “a mere six months before Teva was scheduled (pursuant to [a reverse payment] settlement) to enter the market.” Id. at*6. In other words, even though Mylan and Teva had already agreed through settlement to delay Teva’s generic EAI onto the market, Mylan sought to further delay the entry of Teva’s generic through its Citizen Petition. Id.
In May 2015, five months after the January 2015 Petition and only weeks before the FDA was required to respond, Mylan supplemented its petition with a 48-page independent study purportedly showing that patients would not correctly use Teva’s generic product. Id.
According to the plaintiffs, Mylan’s submissions to the FDA rested on fundamentally flawed studies and the medical opinions of a doctor whom Mylan had paid some $95,000 in fees. Plaintiffs allege that without defendants’ use of the FDA Citizen Petition process, Teva would have entered the market much sooner after it addressed any FDA concerns and secured FDA approval. Id. at *6.
Rejecting Mylan’s assertion otherwise, the court found that these allegations sufficiently alleged that Mylan’s Citizen Petition delayed the FDA approval process. Id. at *27 (citing In re Suboxone (Buprenorphine Hydrochloride and Naloxone) Antitrust Litigation, No. 13-md-2445, 2017 WL 3967911, at *18 (E.D. Pa. Sept. 8, 2017).
Next, the court rejected Mylan’s argument that the Noerr-Pennington doctrine bars plaintiffs’ claims based on the Citizen Petition. Noerr-Pennington “exempts from antitrust liability any legitimate use of the political process by individuals, even if their intent is to eliminate competition.” Tal v. Hogan, 453 F.3d 1244, 1259 (10th Cir. 2006). But Noerr-Pennington immunity does not apply to “sham” activities. Prof’l Real Estate Inv’rs, Inc. v. Columbia Pictures Indus. Inc., 508 U.S. 49, 60–61 (1993). Petitioning the government is a “sham” activity if: (1) it is “objectively baseless in the sense that no reasonable litigant could realistically expect success on the merits,” and (2) it “uses the governmental process—as opposed to the outcome of that process—as an anticompetitive weapon.” Id. The EpiPen court found that the plaintiffs plausibly alleged that Mylan’s “Citizen Petition was objectively baseless because of its timing and contents.” Id. at *28. The court also found that the plaintiffs plausibly alleged Mylan used the process of filing the Citizen Petition to restrain competition, i.e., delay Teva’s market entry.
The court’s conclusion here—that Mylan could not enjoy Noerr-Pennington immunity—places it in a string of recent cases reaching similar conclusions involving “sham” Citizen Petitions. See In re Suboxone, 2017 WL 3967911, at *17; In re: Lipitor Antitrust Litig., 868 F.3d 231, 273-274 (3d Cir. 2017); In re Restasis (Cyclosporine Ophthalmic) Antitrust Litig., No. 18-md-2819-NG-LB, 2018 WL 4473632 at **12-16 (E.D.N.Y. Sept. 18, 2018.
1. For readability, the ® is omitted hereafter. ↩
2. Anaphylaxis is a life-threatening allergic reaction that occurs rapidly after exposure to an allergen. Epinephrine (adrenaline) is used to treat anaphylaxis and is available only by prescription. To treat anaphylaxis effectively, epinephrine must be administered immediately; as little as a thirty-minute delay can be deadly. Consequently, people prone to anaphylaxis are advised to carry an epinephrine auto-injector (“EAI”) at all times. ↩