Lesley E. Weaver and Emily C. Aldridge
Bleichmar Fonti & Auld LLP
A recent decision by the Ninth Circuit may have profound implications in antitrust cases involving wholly owned subsidiaries of parent companies accused of participating in an antitrust conspiracy. In Arandell v. CenterPoint Energy Services, -- F.3d ----, No. 16-17099, 2018 WL 3716026 (9th Cir. Aug. 6, 2018) [Arandell], the Ninth Circuit held that under Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984), a “wholly-owned subsidiary that engaged in coordinated activity in furtherance of the anticompetitive scheme of its parent and/or commonly owned affiliates is deemed to engage in such coordinated activity with the purposes of the single ‘economic unit’ of which it was a part.” Arandell at *5.
Arandell is a class action alleging that ten large natural gas companies colluded to fix retail natural gas prices in Wisconsin. The panel, comprised of Circuit Judges Carlos T. Bea and N. Randy Smith and District Judge Robert S. Lasnik (sitting by designation), reversed the district court’s summary judgment in favor of Defendant CenterPoint Energy Services, Inc. (“CES”), a natural gas company. (CES was a wholly owned subsidiary of Reliant Energy, Inc. (“Old Reliant”). The Reliant family of companies also included Reliant Energy Services, Inc. (“RES” and, together with Old Reliant and the other Reliant codefendants, collectively “Reliant”).)
Copperweldis widely considered a defeat for plaintiffs bringing antitrust class actions, but the Arandell plaintiffs were able to use the decision to their advantage. They could not contest the district court’s holding that, for antitrust purposes, under Copperweld CES was incapable as a matter of law of conspiring with Old Reliant. Instead, Plaintiffs’ theory of the case was that CES was part of a “single entity”—including both Old Reliant and RES—that “intentionally colluded with other, non-Reliant conspirators to manipulate natural gas prices and profit from this manipulation.” Arandell at *4. Therefore, Plaintiffs argued, the district court should have found that as a matter of law it was “not possible for CES to have a different reason than [Old Reliant] and RES for participating in these efforts.” Id.
The Ninth Circuit remarked with approval, “Although the Plaintiffs’ application of the principles laid out in Copperweld is novel, we must agree.” Id. at *5. The Arandell panel noted that “Defendants cannot have the Copperweld doctrine both ways” and held, “It would be inconsistent to insist both (1) that two affiliates are incapable of conspiring with each other for purposes of Section 1 of the Sherman Act because they “always” share a “unity of purpose,” and (2) that one affiliate may escape liability for its own conduct—conduct necessary to accomplish the illegal goals of the scheme—by disavowing the anticompetitive intent of the other, even where the two acted together.” Id.
Background: Copperweld and American Needle
Copperweld, decided by the Supreme Court in 1984, held that a parent company and its wholly owned subsidiary are “incapable of conspiring with each other for purposes of § 1 of the Sherman Act.” 467 U.S. at 777. In a later decision, American Needle v. National Football League, 560 U.S. 183 (2010), the Supreme Court clarified that the appropriate inquiry “is one of competitive reality,” id. at 196, and that “‘substance, not form, should determine whether a[n] . . . entity is capable of conspiring under § 1.’” Id. at 195 (quoting Copperweld, 467 U.S. at 773 n. 21). “The key is whether the alleged contract, combination . . . or conspiracy is concerted action—that is, whether it joins together separate decisionmakers.” Id.
The fact “that two legally distinct entities have organized themselves under a single umbrella or into a structured joint venture” is not dispositive. Id. at 196. Instead, the relevant inquiry is whether there is a conspiracy between “separate economic actors pursuing separate economic interests,” such that the agreement “deprives the marketplace of independent centers of decisionmaking.” Copperweld, 467 U.S. at 768–69.
“Copperweld’s holding turned on the fact that the subsidiary of a corporation, although legally distinct from the corporation itself, ‘pursue[d] the common interests of the whole rather than interests separate from those of the corporation itself.’” Sullivan v. Nat’l Football League, 34 F.3d 1091, 1099 (1st Cir. 1994) (quoting Copperweld, 467 U.S. at 770). “In the Ninth Circuit, related entities are capable of entering into a conspiracy if their interests are sufficiently independent.” Levi Case Co. v. ATS Prod., Inc., 788 F. Supp. 428, 431 (N.D. Cal. 1992).
Arandell Procedural History
Plaintiffs filed their action in Wisconsin state court in December 2006 on behalf of a proposed class of “all industrial and commercial purchasers of natural gas” who purchased natural gas for their own use or consumption in Wisconsin during the class period. Arandell at *2. The defendants are ten large natural gas companies and some of their subsidiaries and affiliates, which allegedly colluded to fix retail natural gas prices in Wisconsin. The action was removed on the basis of diversity jurisdiction to the Western District of Wisconsin and then transferred to a related MDL in the District of Nevada.
The class action complaint alleged that CES sold natural gas in Wisconsin at prices that were artificially inflated as a result of the price-fixing conspiracy between Reliant and other, non-Reliant co-conspirators. Id. at *3. Plaintiffs brought two causes of action under Wisconsin’s antitrust statutes, seeking (1) a declaratory judgment that certain natural gas contracts made during the class period are void under Wisconsin Statute § 133.14 and (2) treble damages for violations of Wisconsin Statute § 133.03, which provides that “[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce is illegal.” Id.
The district court granted CES’s motion for summary judgment, holding that Plaintiffs had not raised a genuine issue of material fact sufficient to support a verdict or judgment under Wisconsin Statute § 133.03(1) because there was “no evidence” that CES knowingly “participated in a conspiracy or direct acts in restraint of trade.” Id. Because Plaintiffs did not allege that CES engaged in any anticompetitive activity or other wrongdoing in or directed to Wisconsin”—but rather alleged only that CES was affiliated with RES and sold gas to Wisconsin consumers—the district court found there was no evidence that CES knowingly engaged in swaps in conspiracy with RES for the purpose of increasing the price of natural gas, or that CES “knew that RES or others were engaged in such behavior.” Id.
Arguments on Appeal
On appeal, Plaintiffs argued in pertinent part that the district court erred in determining that Plaintiffs had not submitted sufficient evidence to raise triable issues as to “(1) whether CES had the requisite intent and purpose to restrain trade, and (2) whether CES did in fact act to further the alleged conspiracy.” Id.
Plaintiffs argued that the evidence on the record established that CES purposely participated in the price-fixing scheme because, as a wholly owned subsidiary of Reliant during the class period, CES is deemed to have shared the intent of the commonly owned Reliant conspirators. Id. at *4. Under Copperweld, CES was part of a “single entity”—including both Old Reliant and RES—that “intentionally colluded with other, non-Reliant conspirators to manipulate natural gas prices and profit from this manipulation.” Id. Therefore, Plaintiffs argued, the district court should have found that as a matter of law, it was “not possible for CES to have a different reason than [Old Reliant] and RES for participating in these efforts.” Id. Plaintiffs also identified evidence it presented to the district court that CES engaged in anticompetitive conduct.
For purposes of summary judgment, CES did not contest the substance of the evidence that Reliant successfully conspired with the other (non-Reliant) defendants and co-conspirators to manipulate retail gas prices. Id. at *5 n.7. As the panel put it, CES asserted “it acted innocently and without knowledge of its parent company’s price-fixing scheme, which had pumped up the price of that gas. Yes, [CES] sold the gas at prices previously rigged by the parent, and yes, [CES] sent the profits back to the parent. But [CES] assert[ed] there is no evidence that it knew the prices were inflated or that it had the purpose to carry out the price-fixing scheme.” Id. at *1.
The Ninth Circuit's Decision
The panel held that plaintiffs submitted sufficient evidence to raise a genuine issue under the Sherman Act—and Wisconsin Statute § 133.03(1)—as to whether CES participated in coordinated activity in furtherance of the alleged inter-enterprise price-fixing conspiracy.
As to CES’s anticompetitive intent, the panel decided that Plaintiffs did not need to submit evidence that CES had an anticompetitive purpose; CES could nevertheless be held liable because Copperweld establishes that “a parent and a wholly owned subsidiary always have a ‘unity of purpose’” and thus act as a ‘single enterprise’ whenever they engage in ‘coordinated activity.’” Arandell at *5 (quoting Copperweld, 467 U.S. 752). The panel explained, “This premise led the Supreme Court to conclude that a parent cannot conspire with its subsidiary, but it also leads inescapably to the corollary conclusion that, for antitrust purposes, it is legally impossible for firms within a single ‘economic unit’ to act together in furtherance of the same price-fixing scheme for independent and distinct purposes.” Id. In other words, “a subsidiary such as CES as a matter of law cannot innocently advance an anticompetitive scheme (here, by selling gas at prices rigged by Reliant and distributing the profits to Reliant) for a legitimate business purpose, while its parent and sister companies purposely advance the very same scheme (here, by rigging the prices upstream) for an illegal, anticompetitive purpose.” Id. As a result, Plaintiffs had raised a triable issue of CES’s anticompetitive intent with their evidence that Reliant’s “economic unit” had an anticompetitive purpose during the class period; that such anticompetitive “purpose” could sustain liability under the federal Sherman Act with or without an additional finding of knowledge; and that Reliant’s alleged illegal purposes are imputed to CES’s coordinated activities. Id.
In its analysis of CES’s anticompetitive acts, the panel noted that Copperweld does not support holding a subsidiary liable for the parent's independent conduct. Id. at *7. As with any antitrust defendant, the panel held, Plaintiffs must put forth evidence that the subsidiary engaged in anticompetitive conduct. The panel found that “CES’s alleged contributions to the conspiracy (selling gas to Wisconsin consumers at the inflated prices and disbursing the profits to Reliant), would be adequate circumstantial evidence of conspiracy, if proved, to permit a finding of liability.” Id. at *7.
Arandell will be an important arrow in the quiver of antitrust plaintiffs in the Ninth Circuit. Plaintiffs seeking to hold a subsidiary liable under federal and state antitrust laws no longer need to prove the subsidiary’s anticompetitive intent. Instead, Arandell provides that the anti-competitive purpose or knowledge of the “single entity” of commonly owned conspirators will suffice. Arandell may be especially advantageous to plaintiffs when proving antitrust liability of U.S. subsidiaries with foreign parent companies.
Ian L. Papendick and Dana L. Cook-Milligan
Winston & Strawn LLP
In Sea Breeze Salt, Inc. v. Mitsubishi Corporation, --- F,3d ----, 2018 WL 3863842 (9th Cir. 2018), the Ninth Circuit affirmed the order of Judge Dolly Gee of the United States District Court for the Central District of California, holding that the act of state doctrine applied to bar antitrust conspiracy claims relating to exclusive distribution contracts concerning Mexican sea salt. The Ninth Circuit held that because defendant ESSA was 51% owned and controlled by the Mexican government, and the conduct at issue concerned the exploitation of the entirety of Mexico’s solar sea salt output, the act of state doctrine barred the plaintiffs’ lawsuit against defendant Mitsubishi Corporation, which owned 49% of ESSA and was granted the exclusive distribution rights by ESSA.
Plaintiffs Innofood, S.A. de C.V., a Mexican corporation, and Sea Breeze Salt, Inc., a California corporation filed suit in the Central District of California alleging an antitrust conspiracy between defendants Exportadora de Sal, S.A. (“ESSA”), a Mexican corporation, and Mitsubishi Corporation, a Japanese entity. Mitsubishi International Corporation, a New York corporation and wholly-owned subsidiary of Mitsubishi Corporation, was also named as a defendant. Sea Breeze Salt, Inc., 2018 WL 3863842 at *1-2.
ESSA is a Mexican salt production corporation 51% owned by the Mexican government and 49% owned Mitsubishi Corp. According to the complaint, ESSA is the world’s largest producer of solar sea salt, accounting for 90% of Mexico’s salt exports and 17% of total global production of salt. Plaintiffs claimed that ESSA’s decision to sell its salt exclusively to Mitsubishi violated federal and California antitrust law. Id.
Although ESSA historically sold all of its salt to Mitsubishi, that started to change when a reformist director general took over ESSA and started entering distribution contracts with other companies. One of those contracts was a February 2014 distribution contract between ESSA and plaintiff Innofood. Id.
However, after ESSA’s director general was terminated in late 2014, ESSA refused to honor purchase orders issued by Innofood under its distribution contract with ESSA. That breach prevented Innofood from being able to fulfill its contractual obligation to sell ESSA’s salt to plaintiff Sea Breeze, which caused Sea Breeze to be unable to fulfill purchase orders in the United States. Id.
The plaintiffs asserted five claims arising from ESSA’s decision to sell its salt to Mitsubishi exclusively and refusal to honor its contracts with plaintiffs: (1) an illegal restraint of trade under Section 1 of the Sherman Act, (2) an unlawful exclusive agreement under the Clayton Act, (3) an unlawful restraint of trade under California’s Cartwright Act, (4) intentional interference with contractual relations under California law, and (5) intentional interference with prospective economic advantage under California law. Id.
The plaintiffs only served the Mitsubishi defendants—not ESSA. The Mitsubishi defendants moved to dismiss the complaint on based on the act of state doctrine, forum non conveniens, and for failure to state a claim. Judge Gee found that the action was barred by the act of state doctrine and did not reach the other arguments presented, and granted the motion to dismiss, holding that “(1) the alleged conduct constituted the official acts of a foreign sovereign within its own borders, (2) relief would require the court to declare invalid the official acts of that foreign sovereign, and (3) no exception to the act of state doctrine applied.” Id.
Because ESSA was never served with the complaint, the district court also dismissed the claims against ESSA for failure to serve, further noting that the “grounds on which the case was dismissed as to the Mitsubishi defendants would in fact apply with equal (if not greater) force to ESSA.” Id.
Plaintiffs appealed, and the Ninth Circuit, in an opinion authored by Judge Wardlaw, held that “[t]he district court correctly dismissed the action under the act of state doctrine.” Id. at *2.
The Ninth Circuit's Analysis
The Ninth Circuit explained that “[u]nlike the Foreign Sovereign Immunities Act (“FSIA”), which is jurisdictional, the act of state doctrine is a substantive defense on the merits.” Id. at *2 (quotation marks and citations omitted). 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. (quoting W.S. Kirkpatrick & Co. v. Envtl. Tectonics Corp., Int’l, 493 U.S. 400, 404 (1990)) (quotation marks omitted). Courts must thus be careful in their application of the act of state doctrine and ensure that “[e]very sovereign State is bound to respect the independence of every other sovereign State, and the courts of one country will not sit in judgment on the acts of the government of another done within its own territory.” Id. at *3 (quoting Credit Suisse v. U.S. Dist. Court, 130 F.3d 1342, 1346 (9th Cir. 1997)).
The act of state doctrine bars lawsuits when two elements are satisfied: “(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. (quoting Credit Suisse v. U.S. Dist. Court, 130 F.3d 1342, 1346 (9th Cir. 1997)).
However, there is an exception—even when the act of state doctrine’s elements are satisfied, courts may also evaluate the factors explained in Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398 (1964), to evaluate “the extent to which the policies underlying the doctrine justify its application.” Id. (quoting W.S. Kirkpatrick & Co., 493 U.S. at 409) (quotation marks omitted).
The Ninth Circuit addressed these considerations in turn:
Official Act of a Foreign Sovereign Performed Within its Territory
The Ninth Circuit considered two issues in determining whether ESSA’s actions were the official acts of a foreign sovereign: first, whether the actions of ESSA—a corporate entity and not a government agency or official—could be considered a sovereign acts; and second, whether ESSA’s alleged conduct “constitute a sovereign, official act.” Id. at*3 (emphasis added).
Even though ESSA was a corporation, and not a government agency or official, the Ninth Circuit explained that “[g]iven that a government must always act through agents, it makes no difference for act of state purposes whether that agent is an individual, an agency, or a majority-owned and controlled corporation, so long as the acts in question are official, sovereign acts.” Id.
Thus, because the Mexican government owned 51% of ESSA and appointed its chief executive and majority of its board of directors, the Ninth Circuit concluded that “ESSA’s actions, to the extent they constitute official acts, are the acts of the Mexican government.” Id. The Ninth Circuit took this opportunity to “make explicit here what was implicit in [prior decisions]: that an official act for purposes of the act of state doctrine may be performed by an instrumentality of a foreign sovereign, such as a government-owned corporation. The critical question is not the identity of the actor, but rather the nature of the act itself.” Id.
The Ninth Circuit then cited to “a long line of decisions by this and other courts of appeals [that] hold that a nation’s decisions about the exploitation of its own natural resources are quintessentially sovereign in nature.” Id. Indeed, the natural resource in question in this litigation—sea salt—is expressly “included within the list of natural resources that the Mexican Constitution commits to state ownership . . . .” Id. at *4.
Thus, the court concluded that the first element of the act of state doctrine was satisfied because “Mexico’s salt is a sovereign natural resource[, and] our precedent, and that of other circuits, teaches that its exploitation is therefore a sovereign act,” and because all of the conduct challenged in the complaint occurred within Mexico. Id. Accordingly, Mexico’s decision, through its instrumentality ESSA, about how to distribute its sea salt, i.e., exclusively through Mitsubishi, was an official, sovereign act. Id.
Invalidation of A Foreign Sovereign's Official Act
The Ninth Circuit next considered whether the relief sought by the plaintiffs would require the court “to invalidate Mexico’s sovereign decisions about the exploitation of its natural resources.” Id. at *5. Looking at the plaintiffs’ five causes of action, the court found this element was satisfied because in order for plaintiffs’ claims to succeed, the court would have “to pass judgment on the lawfulness of [ESSA’s] decision” to distribute all of its salt through Mitsubishi, “thereby ‘instructing a foreign sovereign to alter its chosen means of allocating and profiting from its own valuable natural resources.’” Id. (quoting Int’l Ass’n of Machinists v. Org. of Petroleum Exporting Countries, 649 F.2d 1354, 1358 (9th Cir. 1981) (“IAM”)). “What’s more, plaintiffs seek injunctive relief, which would amount to a quite literal instruction to Mexico to alter the way it profits from its salt.” Id. at *6.
Consideration of the Sabbatino Factors
The Ninth Circuit acknowledged that under the Supreme Court’s Sabbatino decision, even if the above factors support the application of the act of state doctrine, “courts may look to additional factors to determine whether application of the act of state doctrine is justified.” Id. at *6.
Sabbatino sets forth three factors to consider when evaluating whether the act of state doctrine is being properly applied: “[f]irst, the greater the degree of codification or consensus concerning a particular area of international law, the more appropriate it is for the judiciary to render decisions regarding it. Second, the less important the implications of an issue are for our foreign relations, the weaker the justification for exclusivity in the political branches. And finally, . . . [whether] the government which perpetuated the challenged act of state is no longer in existence.” Id. (quotation marks and citations omitted).
The Ninth Circuit found that none of these factors were present in this action. First, “there is no international consensus” condemning a sovereign’s “exploitation of its own natural resources.” Id. at *6. Second, the Ninth Circuit found that this case has “potentially important implications for our foreign relations” because of “the very nature of an action that, if successful will result in a United States court telling a foreign sovereign what to do with its own natural resources raises the ‘possibility of insult to the [foreign] state and of interference with the efforts of the political branches to seek favorable relations with’ that state.” Id. at *7 (quoting IAM, 649 F.2d at 1361). The court observed that this was particularly true given the “scale and importance of the resources at issue”—ESSA produces 90% of Mexico’s salt exports and 17% of the total global salt output. Id. And as to the third factor, “it is undisputed that the government of Mexico continues to exist.” Id.
No Determination About Existence of Commercial Exception to the Act of State Doctrine
Finally, the Ninth Circuit addressed the plaintiffs’ argument that the court should apply a commercial exception to the act of state doctrine. Id. at *7. A plurality of the Supreme Court discussed a commercial exception to the act of state doctrine in Alfred Dunhill of London, Inc. v. Republic of Cuba, 425 U.S. 682 (1976), which would “distinguish between the public and governmental acts of sovereign states on the one hand and their private and commercial acts on the other.” Id. at *7 (quotation marks omitted).
The Ninth Circuit surveyed decisions concerning the existence of the commercial exception, observing that previous Ninth Circuit decisions have alternatively “appeared to reject a commercial exception” on the one hand, and “stressed that the existence of a commercial exception is an undecided question,” on the other. Id at *7. The court further observed that the Fifth and Eleventh Circuits have held that the exception does not exist, while the D.C. Circuit has adopted it. Id. at *8.
Ultimately, the court determined that it “need not decide whether the act of state doctrine includes a commercial exception, because any such exception would be inapplicable here,” because “the acts alleged here—decisions about the exploitation and distribution en masse of Mexico’s sovereign natural resources—are exactly the kinds of powers that are ‘peculiar to sovereigns.’” Id. at *8.
The Ninth Circuit concluded that the district court properly applied the act of state doctrine, but it also emphasized “the narrow nature” of the holding, explaining that “on the facts of this case—which amount to a challenge to the Mexican government’s policy decision about how to dispose of essentially its entire salt output—application of the act of state doctrine is appropriate to preclude out courts’ consideration of the action.” Id. at *9 (emphasis added). Although the court took the opportunity in this case to expressly state that the actions of corporations 51% owned by a foreign government can claim the benefits of the act of state doctrine—and that their alleged co-conspirators can invoke the doctrine in their own defense—it is uncertain whether the act of state doctrine could apply to foreign government-owned corporations that are less-than majority controlled by that government.
Harrison (Buzz) Frahn, Jennifer S. Palmer, Tomi Mendel
Simpson Thacher & Bartlett LLP
In a July 27, 2018 decision, the Ninth Circuit affirmed a ruling rejecting the Sherman Act claims of a group of golf caddies (“Caddies”) who challenged the PGA Tour’s requirement that they wear bibs containing various advertisements during tournaments. Hicks v. PGA Tour, Inc., 2018 WL 3597316 (9th Cir. July 27, 2018). Although bib-wearing has been a long-standing practice in the golf profession, the Caddies argued that the requirement violated antitrust law by foreclosing any opportunity for the Caddies to feature their own sponsors and endorsements. Additionally, the Caddies argued that the practice artificially restricted the supply of advertisements in two proposed markets: the Endorsement Market and the Live Action Advertising Market. Ultimately, both the Northern District of California and the Ninth Circuit held that the Caddies had not alleged any plausible market, and thereby dismissed the federal antitrust claims.
Defendant PGA Tour is a professional golfing organization that administers three different tours of golf tournaments throughout the year: The PGA Tour, the Champions Tour, and the Web.com Tour. Second Amended Complaint, Hicks v. PGA Tour, Inc., 3:15-cv-00489, ECF No. 77 ¶ 68 (N.D. Cal. Sept. 11, 2015). These events feature competition by professional golfers, each of whom, in order to participate, must partner with a caddy. Id. at ¶ 69. Generally, a caddy is an independent contractor who, in addition to carrying the bag of golf clubs, serves as a golfer’s deputy, helping to navigate course topography and conditions as well as develop general strategy. Caddies have traditionally served an important role in the sport as “coaches, strategists, and counselors to professional golfers.” Hicks, 2018 WL 3597316 at *1.
The PGA tournaments, which take place at different golf courses throughout the year, are run by third-party organizations or “Local Hosts.” Id. at *2. The PGA Tour and the Local Hosts collaborate on each PGA event, and, in relevant part, make joint decisions about sponsorships and advertising. Id. One advertising pursuit they have long undertaken together is to design unique “bibs” for Caddies to wear during the course of play at each tournament. Id. As part of their contracts to participate, the Caddies agree to wear these bibs, which drape over their shoulders and cover their shirts, as part of their required uniform. Id. The bibs are unique to each tournament, but generally feature the name of the Caddy’s golfer, as well as the logo of the tournament and the logos of major sponsors. Id. Thus, they function as an advertisement targeting in-person spectators and television viewers. In their Second Amended Complaint, the Caddies contended that these bibs were worth $50 million in advertising value each year, with the PGA Tour and Local Hosts receiving the entirety of the money generated. Hicks, 3:15-cv-00489, ECF No. 77 ¶ 10 (N.D. Cal. Sept 11, 2015).
Northern District of California Dismisses the Caddies' Claims
Named plaintiff William Michael Hicks, a PGA Tour Caddy with approximately thirty-three years of experience, filed a complaint challenging the bib requirement on February 3, 2015, with amended complaints filed on March 16, 2015 and September 11, 2015. Hicks and 167 other Caddies purported to represent a class of all Caddies residing in the United States who were, without remuneration, made to wear bibs during PGA tournaments featuring the logos of PGA Tour sponsors and affiliates. Id. at ¶ 173. The Second Amended Complaint challenged the bib requirement as violating federal antitrust law under the Sherman Act and also raised various other legal theories, including breach of contract, duress, right of publicity/misappropriation of likeness, unjust enrichment, and violations of the California Unfair Competition Law and the Lanham Act.
Judge Vince Chhabria of the Northern District of California granted the PGA Tour’s motion to dismiss the claims in the Caddies’ Second Amended Complaint. The court began by addressing the Caddies’ various non-antitrust theories, including breach of contract, unjust enrichment, and the right of publicity/misappropriation of likeness, rejecting each in turn and noting that “caddies have been required to wear the bibs for decades[, s]o caddies know, when they enter the profession, that wearing a bib during tournaments is part of the job [and] the primary part of a caddie’s uniform.” Hicks v. PGA Tour, Inc., 165 F. Supp. 3d 898, 905 (N.D. Cal 2016)
Turning to the Sherman Act claims, the court analyzed the threshold question of whether the Caddies had alleged that the PGA Tour had “market power within a ‘relevant market,’” along with offering a “facially plausible definition of that market.” Id. at 908 (citing Newcal Indus., Inc. v. Ikon Office Sol., 513 F.3d 1038, 1044-45 (9th Cir. 2008)). “This threshold requirement,” the court explained, “exists to prevent the antitrust laws from applying too broadly.” Hicks, 165 F. Supp. 3d at 908. In this case, the Caddies had proposed two different markets: “the Endorsement Market” and “the Live Action Advertising Market.” Id. at 909. According to the Caddies, both of these markets involved advertisers targeting professional golf fans—who the Caddies claimed were wealthier, older, and more likely to have interest in luxury goods and services that would not appeal to fans of other sports. Id.
The Caddies described the proposed Endorsement Market as “the national market for the endorsement of products and services by participants in professional golf tournaments.” Id. An endorsement by a professional golfer or Caddy, they argued, was not reasonably interchangeable with other advertisement avenues like television, magazines, the internet, or posters, because “golf fans cannot ignore, say, a Nike hat worn by a golfer during a tournament in the same way they could ignore a Nike ad in a magazine.” Hicks, 165 F. Supp. 3d at 909.
As for the proposed Live Action Advertising Market, the Caddies described it as “the national . . . market for in-play or in-action commercial advertising at professional golf events between commercial breaks.” Id. (emphasis added). The district court explained that this proposed market was “different from the endorsement market in one sense: with the live action advertising market, it does not matter whether the advertisement of a product comes in the form of an endorsement.” Id. In other words, this proposed market included all forms of advertising on display during live tournament play at PGA events, including golfer apparel, the Caddies’ bibs, logos displayed during the television broadcast, and signage around the golf course. Id. at 909-10. The Caddies argued that these types of advertisements formed a distinct market because “broadcast viewers can fast-forward through commercials, or ignore magazine ads or posters, but cannot readily avoid observing a logo that appears on screen in tournament play.” Id.
Reviewing the Caddies’ two proposed markets, the court held that the allegations that these markets were distinct from other forms of advertising to golf fans were “not plausible.” Hicks, 165 F. Supp. 3d at 910. The court reasoned that different forms of advertising may have certain advantages or disadvantages, noting that a company can communicate a “detailed verbal and visual message” in a television ad, whereas a magazine ad is non-verbal, but “might be hard to ignore if it appears on the page opposite an article someone is reading.” Id. According to the court, however, “it’s not enough to allege that these forms of advertising have differences;” rather, the Caddies had to show that the bib advertising was not “reasonably interchangeable” with other advertising methods. Id. “If it became too expensive to put a logo on a bridge,” the court reasoned, “there is no logical reason a company wouldn’t decide instead to put its logo on a magazine ad, or on a wall in golf course clubhouses, or any number of other places.” Id. Ultimately, the court dismissed the antitrust claims with prejudice, reasoning that the proposed product markets were “not natural” and that the Caddies could not explain “how they could state an antitrust claim using a plausible product market definition.” Id. As to the related allegation under California’s Unfair Competition Law, Cal. Bus. & Prof. Code § 17200, the district court dismissed this claim with prejudice as well, explaining that “the conduct the caddies assert is unfair under the UCL overlaps completely” with the other allegations in the Complaint. Id. at 911.
The Ninth Circuit Affirms the District Court's Dismissal
On appeal, the Ninth Circuit held that the district court had properly determined that the Caddies did not allege plausible products markets. Hicks, 2018 WL 3597316 at *5. The Ninth Circuit expanded on the district court’s analysis, analyzing the Caddies’ proposed markets as potential “submarkets” of the general advertising sphere. Id. at *8-9. A submarket can form the basis for an antitrust claim where the plaintiff can show “that the alleged submarket is economically distinct from the general product market.” Id. at *8. Citing the Supreme Court’s opinion in Brown Shoe v. United States, 370 U.S. 294, 325 (1962), the Ninth Circuit described several indicia of an “economically distinct submarket:” recognition as a separate economic entity; a product’s unique characteristics, uses, or mode of production; a distinct customer base; specialized vendors; and unique sensitivity to changes in price. Hicks, 2018 WL 3597316 at *8.
Echoing the district court’s reasoning, the Ninth Circuit explained that the Caddies’ proposed submarkets “omit many economic substitutes,” including “commercials during golf-related television programs, radio broadcasts, or podcasts,” advertisements “on golf-related websites or social media pages,” and “advertising through a search engine or social media platform that provides advertisers insights on users’ online history.” Id. at *9. Even assuming that golf fans constitute a unique customer base, the court explained that “judicial experience and common sense” suggest that there is no basis to distinguish between the advertising that occurs during commercial breaks and that which occurs during tournament play. Id. at *8-9.
Next, the court addressed the Caddies’ various claims as to why these markets are in fact distinct. The Caddies repeated their assertions that: (1) in-play advertising cannot be ignored or skipped over; (2) endorsements made by Caddies or golfers are much more effective forms of advertising; (3) unique subsets of companies, such as those who cannot afford to pay for television commercials, often purchase live-action advertisements; and (4) econometric studies allegedly show that purchasers in the proposed markets “’will not switch to products outside of th[ose] market[s] in response to a small but significant and non-transitory price increase by [the Tour] . . . to such a degree that the price increase is unprofitable.” Id. at *9.
The Ninth Circuit rejected each of these arguments. The fact that some forms of advertising are easier to avoid, it reasoned, does not suffice to show that they make up a distinct market. Id. To conclude otherwise, the court continued, would rest on the “implausible assumption” that golf fans who watch PGA Tour broadcasts “either consume no other forms of golf media or [are] uninfluenced by advertisements in all other forms of golf media.” Id. As to the Caddies’ claims regarding the uniquely small companies that most often used in-play advertising, the Ninth Circuit noted that these companies could also advertise through “smaller golf periodicals, less frequented websites, and radio programs,” even if television commercials were prohibitively expensive. Id. Finding that the Caddies’ argument about econometric studies was a “legal conclusion veiled as a factual allegation,” the court declined to consider this claim at the motion to dismiss stage. Id.
Next, the court reviewed similar cases from sister circuits and found them to be consistent with the conclusion that the Caddies’ antitrust claims should be dismissed. For example, in Chapman v. New York State Division for Youth, 513 F.3d 230, 237-78 (2d Cir. 2008), the Second Circuit affirmed a dismissal of antitrust claims where plaintiffs had “failed to show how the market for restraint training services to child care providers is any different from the larger market for restraint training services to other businesses, agencies, and organizations.” Id. at 238 (emphasis in original). Likewise, a case from the Fifth Circuit, PSKS, Inc. v. Leegin Creative Leather Products Inc., 615 F.3d 412, 416-19 (5th Cir. 2010), also resulted in a dismissal based on an implausible proposed product market definition. There, the plaintiffs had proposed a market “limited to a specific brand of women’s accessories,” but could not show any “structural barrier to the interchangeability of [these] products with goods produced by competing manufacturers.” Id. The Fifth Circuit rejected a second proposed market, for “brand-name women’s accessories,” because plaintiffs failed to allege that brand-name products were not interchangeable with non-brand name substitutes. Id. Similarly, the Hicks court also found support among the federal courts for its rejection of a proposed market limited to a single type of advertising. Hicks, 2018 WL 3597316 at *10 (citing Am. Online, Inc. v. GreDeals.Net, 49 F. Supp. 2d 851, 858 (E.D. Va. 1999); Huron Valley Publ’g Co. v. Booth Newspapers, Inc., 336 F. Supp. 659, 662 (E.D. Mich. 1972)).
The Ninth Circuit then concluded that the district court had correctly dismissed the federal antitrust claims and the related allegations under California’s Unfair Competition Law. Hicks, 2018 WL 3597316 at *11. Noting, however, that the “district court made a ‘simple denial of leave to amend’ here without adequate explanation,” the Court of Appeals vacated the district court’s decision to dismiss these claims with prejudice. Id. (quoting Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir. 2003)). Defendant PGA Tour had not identified any prejudice it would experience from allowing the Caddies to amend their Complaint, and the Ninth Circuit could not conclude that such an amendment by the Caddies would be futile. Id. Accordingly, the case was remanded with instructions that the district court reconsider the decision to deny the Caddies leave to amend their antitrust and state unfair competition claims.
The Ninth Circuit’s decision in Hicks v. PGA Tour, affirming the district court’s dismissal of the federal antitrust and various other claims, has put an end to the Caddies’ initial challenges to the bib requirement. In vacating the decision to dismiss with prejudice, however, the Ninth Circuit has offered the Caddies a chance to refine their proposed market definition and revive their claims. It remains to be seen whether they will take advantage of this mulligan in the coming months.
Elizabeth T. Castillo
Cotchett Pitre & McCarthy LLP
On August 7, 2018, the U.S. Court of Appeals for the Ninth Circuit affirmed the U.S. District Court for the Northern District of California’s dismissal of a complaint alleging that the United States Olympics Committee (Olympic Committee) and USA Track & Field (USATF) engaged in an anticompetitive conspiracy in violation of Section 1 of the Sherman Act by imposing advertising and logo restrictions during Olympic Trials of track and field athletes. Reviewing the case de novo, and relying on the objective of the Ted Stevens Olympic and Amateur Sports Act (ASA) as well as rulings from the Tenth and Eleventh Circuits, the Ninth Circuit concluded that “the advertising and logo restrictions applied by the Olympic Committee and USATF to sponsorship of individual athletes should be afforded implied antitrust immunity under the ASA.” Gold Medal LLC v. USA Track & Field, No. 16-35488, 2018 U.S. App. LEXIS 21928, at *16 (9th Cir. Aug. 7, 2018).
In an opinion by Circuit Judge Johnnie B. Rawlinson, the Ninth Circuit acknowledged that “implied antitrust immunity is not favored” and “can be justified only by a convincing showing of clear repugnancy between the antitrust laws and the regulatory system” Id. at *7-8. The appeals court nevertheless agreed with the district court’s application of implied antitrust immunity under the ASA given the “convincing showing of clear repugnancy” and the finding that advertising restrictions were integral to the Olympics Committee and USATF’s performance of duties under the ASA. Id. at *16-17.
Appellant Gold Medal LLC d/b/a Run Gum (Run Gum)—created by track star Nick Symmonds—manufactures “compressed functional chewing gum” containing “a proprietary mix of caffeine, taurine, and b vitamins” and sought to sponsor track and field athletes during the Olympic Trials. Id. at 4. Appellees Olympic Committee and USATF are national sports governing bodies that Congress empowered to “promote and finance the participation of American athletes in ‘international amateur athletic competition.” Id. at 3. Run Gum filed a complaint alleging the Olympic Committee and USATF’s advertising restrictions limited the sponsorships of athletes during Olympic Trials. Specifically, the Olympic Committee and USATF restrict the type of individual sponsors that athletes can display on their athletic apparel at Olympic Trials, allowing the logo and names of certain pre-approved manufacturers (e.g., Nike) and excluding other would-be sponsors (e.g., Run Gum).
In a published opinion, the district court dismissed Run Gum’s action based on the ASA’s grant of implied antitrust immunity. Gold Medal LLC v. USA Track & Field, 187 F. Supp. 3d 1219, 1222 (D. Or. 2016). The lower court found the advertising restrictions enabled the Olympic Committee and USATF to fulfill their statutory obligations under the ASA—that is, to raise finances required to organize Team USA and to compete in the Olympic Games. Id. at 1228. The trial court indicated such restrictions “prevent a dilution of the Olympic brand” and permit the Olympic Committee and USATF to “play a gatekeeping function which preserves the exclusivity—and thus value—of the Olympic symbols and name.” Id. at 1230.
In affirming the district court’s dismissal, the Ninth Circuit addressed implied antitrust immunity under the ASA for the first time. The Ninth Circuit found persuasive the Eleventh Circuit’s decision in JES Props., Inc. v. USA Equestrian, Inc., 458 F.3d 1224 (11th Cir. 2006). In JES Properties, the Eleventh Circuit upheld the United States Equestrian Foundation (Equestrian Foundation)’s rule imposing a distance of a minimum of 250 miles apart for A-rated equestrian competitions. Gold Medal, 2018 U.S. App. LEXIS 21928, at *8. The rule’s purposes were to create the most competitive international equestrian team by concentrating elite riders into fewer competitions and to promote equestrianism nationwide by holding recognized competitions in more diverse locations. Id. The appeals court noted the “monolithic control” exercised by national governing bodies and reasoned that applying antitrust laws there would unduly interfere with the operation of the Equestrian Foundation and the ASA. Id. at *8-9. The Eleventh Circuit emphasized it was not required to “focus on whether the rule is an effective or wise way of implementing [the Equestrian Foundation’s] powers” or to “consider whether the particular eligibility rule was necessary or otherwise examine the wisdom of the rule.” Id. at *9.
The Ninth Circuit likewise found persuasive the Tenth Circuit’s decision in Behagen v. Amateur Basketball Ass’n of the United States, 884 F.2d 524 (10th Cir. 1989). In Behagen, the Tenth Circuit reversed a jury verdict in favor of a basketball player who challenging an eligibility rule developed by the Amateur Basketball Association of the United States of America prohibiting a player from participating in amateur events if the player had participated in professional games. Gold Medal, 2018 U.S. App. LEXIS 21928, at *9-10. The Tenth Circuit stated that the antitrust issue should not have gone to the jury because the eligibility rule was exempt from antitrust laws under the ASA. Id. at *10. The appeals court noted the “monolithic control” exerted by the national governing body directly resulted from the congressional intent expressed in the ASA. Id. at *10.
The Ninth Circuit stated reversal of this case was unwarranted under the Fifth Circuit’s decision in Eleven Line, Inc. v. N. Tex. State Soccer Ass’n, Inc., 213 F.3d 198 (5th Cir. 2000). In Eleven Line, the Fifth Circuit declined to afford implied antitrust immunity to nonprofit, volunteer run soccer organizations. Gold Medal, 2018 U.S. App. LEXIS 21928, at *11. The nonprofit organization in that case imposed a rule—which the national governing body for youth soccer did not approve or challenge—requiring soccer players, coaches, and referees to conduct soccer games at sanctioned facilities. Id. Eleven Line’s for-profit soccer facility was not a sanctioned facility. Id. The appeals court recognized, however, the propriety of applying implied antitrust immunity under the ASA when a national governing body develops or approves—as is the case in Gold Medal. Id. at *2.
In summary, the Ninth Circuit ruled JES Properties and Behagen provided sound reasons for affirming the district court’s application of implied antitrust immunity to the advertising and logo restricts promulgated by the Olympic Committee and the USATF. Id. at *13. Pursuant to the ASA, these governing bodies were authorized to “organize, finance, and control the representation of the United States in the competitions and events of the Olympic Games, the Paralympic Games, and the Pan-American Games, and obtain, directly or by delegation to the appropriate national governing body, amateur representation for those games.” Id.; 36 U.S.C. § 220505(c)(3). The broad authority enabled the Olympic Committee and USATF to protect the value of corporate sponsorship and maximize sanctioned fundraising by imposing advertising and logo restrictions. Gold Medal, 2018 U.S. App. LEXIS 21928, at *13-14. The panel majority remarked that “an injunction preventing enforcement of the advertisement regulation ‘would open the floodgates’ the Ninth Circuit held that potential advertisers, some of which might enhance the Olympic brand and some of which might devalue the Olympic brand.” Id. at *17.
Judge Jacqueline Nguyen issued a short concurrence, stating that she disagreed with the majority’s conclusion that defendants are immune from the antitrust claim. She nevertheless opined that the complaint failed to state a claim under Section 1 of the Sherman Act, because it lacked allegations that the USATF or ISOC received any economic benefit from the restrictions. Id. at 18-19.
In Gold Medal, the Ninth Circuit became the third appellate court to find that implied antitrust immunity applies in the amateur sport context, despite the fact that the ASA does not expressly mention antitrust immunity. This decision illustrates the breadth of antitrust immunity and deference to the defendant’s judgment that federal circuit courts have afforded amateur sports governing bodies under the ASA.