Pillsbury Winthrop Shaw Pittman LLP
On September 3, 2019, Judge Jeffrey S. White of the Northern District of California granted in large part the motions to dismiss filed by Defendants Micron, Samsung, and Hynix in a putative class action brought by indirect purchasers of Dynamic Random Access Memory (“DRAM”). Jones v. Micron Tech. Inc., 400 F. Supp. 3d 897, 904 (N.D. Cal. 2019). The Plaintiffs’ complaint alleged that Defendants conspired to reduce the supply of DRAM in order to drive up prices, in violation of Section 1 of the Sherman Act, California’s Cartwright Act and Unfair Competition Law, and the laws of various other states. Id. at 904, 913-14, 923.
Although the District Court granted the indirect purchasers leave to amend, Judge White handed Defendants a number of major victories, holding, inter alia, that the named Plaintiffs: (1) lacked Article III standing because they failed to allege injury that was traceable to Defendants’ conduct; (2) lacked Article III standing to bring state law claims in states where they did not reside and were not injured; (3) lacked federal antitrust standing because they failed to sufficiently link the markets for DRAM components and DRAM end-products; (4) failed to allege sufficient “plus factors” to state a claim under the Sherman Act or Cartwright Act based on circumstantial evidence of conspiracy; and (5) failed to sufficiently allege various other state law antitrust and unfair competition claims.
DRAM is a semiconductor memory device that is widely used in digital electronics like smartphones and laptops. Defendants are manufacturers and sellers of DRAM who primarily sell to original equipment manufacturers (“OEMs”). OEMs incorporate DRAM into various digital electronic end products and then sell those end products to consumers or retailers. Plaintiffs represent a putative class of purchasers of end products containing DRAM during the alleged class period from mid-2016 through early 2018. Id. at 904.
Plaintiffs allege that, beginning in early 2016, Defendants conspired to reduce the supply of DRAM by using public statements to signal invitation to collude and to reassure one another of continued participation in the conspiracy. Plaintiffs also allege that the oligopolistic nature of the DRAM market—where Defendants were responsible for 96% of worldwide sales—facilitated collusion, and that Defendants’ reduction of DRAM supply in 2016 was a departure from their prior pursuit of increased market share. Id.
Article III Standing
Judge White identified two separate questions regarding Article III standing raised by Defendants: (1) whether Plaintiffs had sufficiently pled injury traceable to Defendants’ involvement in the alleged conspiracy, and (2) whether Plaintiffs could bring state law claims of states where they do not reside and were not injured. Id. at 907. The District Court answered both questions in Defendants’ favor.
With regard to traceability, the Court explained that Article III requires that “indirect purchaser complaints must include allegations (i) defendants overcharged direct purchasers and (ii) some or all of that overcharge was passed on to indirect purchasers through each of the various intermediate levels of the distribution chain.” Id. Although Plaintiffs “alleged market conditions, product characteristics, and economic theory that make it ‘likely’ that complete passthrough of increased DRAM prices occurred,” they failed to provide sufficient “detail concerning the varieties of types, makes, and models of the products implicated in the Complaint.” Id. Specifically, Plaintiffs failed to list the types of “relevant DRAM devices” that they intend to reach, failed to identify pertinent OEMs or retailers, and failed to explain how much of end-product costs are attributable to DRAM components. Id. at 908 & n.2. “Given the nebulous parameters of this market” of end products containing DRAM, it was not clear “from the face of the Complaint . . . that the supracompetitively-priced DRAM component and its supracompetitive price wended their way into the DRAM Products Plaintiffs purchased,” and thus Plaintiffs lacked Article III standing for any of their claims because they “failed to meet the traceability threshold.” Id. at 907-908.
As for Plaintiffs’ attempt to bring so-called “sister state” claims for multiple similar state law causes of action, Judge White recognized that “[c]ourts in the Ninth Circuit have consistently held that a plaintiff in a putative class action lacks standing to assert claims under the laws of states other than those where the plaintiff resides or was injured.” Id. at 908 & n.3. Here, Plaintiffs brought claims under the laws of twenty-five states, but alleged residency in just five states (California, Florida, Michigan, Kansas, and New Hampshire) and did not allege any pertinent connection to the other twenty states. Id. at 909. Thus, Plaintiffs lacked Article III standing to bring claims under the laws of those twenty states on this additional basis. Id. Judge White also rejected Plaintiffs’ argument that standing to bring sister state claims is more appropriately resolved at class certification, rejecting Judge Chen’s ruling to the contrary in In re Chrysler-Dodge-Jeep Ecodiesel Litigation, 295 F. Supp. 3d 927, 953-56 (N.D. Cal. 2018), as “something of an outlier” given the fact that “multiple opinions issuing from district courts in the Ninth Circuit, at the pleading stage of a putative class action, have dismissed sister state claims based on the named plaintiff’s standing.” Id. at 909-10 (collecting cases).
The Court next addressed Defendants’ argument that Plaintiffs lacked the antitrust standing required to bring a private action under the Sherman Act, examining the five factors set forth in Associated General Contractors of California, Inc. v. California State Council of Carpenters, 459 U.S. 519, 535 (1983) (“AGC”): “(i) the nature of the plaintiff’s injury, (ii) the directness of the injury, (iii) the speculative measure of the harm, (iv) the risk of duplicative recovery, and (v) the complexity in apportioning damages.” Id. at 911. In terms of the first AGC factor, Judge White recognized that Plaintiffs could plead antitrust injury by showing that the DRAM end-product market is “inextricably intertwined” with the allegedly restrained DRAM component market, but held that Plaintiffs had failed to do so based on the same lack of specificity that defeated traceability. Id. at 911-12 (distinguishing the allegations in Batteries and TFT-LCD as sufficiently detailed to link component and end-product markets). Due to this same lack of detail, particularly regarding the significance of the DRAM component relative to the final end-product price, the District Court found that the second, third, and fifth AGC factors also weighed against antitrust standing. Id. at 912-13. As the fourth AGC factor regarding duplicative recovery was neutral in light of a parallel direct purchaser action, the Court dismissed Plaintiffs’ Sherman Act claim for lack of antitrust standing as well. Id. at 913; see also id. at 913-14 (holding that the AGC test also applies to Plaintiffs’ Iowa, New Mexico, and Nebraska claims, but not their New Hampshire claim, and declining to address AGC’s applicability to other state law claims).
Circumstantial Allegations of Conspiracy in Violation of the Sherman Act
Notwithstanding its conclusions that Plaintiffs lacked Article III and antitrust standing, the District Court also considered whether the complaint sufficiently alleged an agreement to restrain trade in violation of the Sherman Act. Id. at 914-922. Judge White explained that because Plaintiffs attempted to plead an antitrust claim based on circumstantial rather direct evidence, they “must present allegations of parallel conduct of the defendants as well as so-called ‘plus factors’”—“economic actions and outcomes that are largely inconsistent with unilateral, lawful conduct but largely consistent with explicitly coordinated action.” Id. at 915. While the Court found that the complaint pled parallel conduct by alleging a common shift among Defendants from “vigorous supply and price competition” to “the same policy of declining to increase their own supplies of DRAM,” id. at 915-16, it rejected all but one of the supposed plus factors identified in the Complaint, id. at 916-22.
The District Court first rejected as a plus factor the conditions of the DRAM market—specifically “that the DRAM market is oligopolistic with high barriers to entry” and “that DRAM is a commodity and that demand for DRAM is inelastic.” Id. at 916. While the Court acknowledged that “an oligopolistic market could facilitate unlawful anticompetitive behavior” because a small number of competitors can more easily maintain an agreement, it also recognized that a small number of competitors makes it “increasingly likely that lawful conscious parallel behavior or interdependent pricing (following each other’s pricing decisions) will occur without prior agreement.” Id. at 917. Similarly, the fungibility of commodities may help detect conspiracy defections, but also makes market participants more “likely to monitor and mimic the behavior of competitors carefully because pricing provides the chief competitive leverage.” Id. (emphasis in original). Thus, Plaintiffs’ allegations regarding market conditions were “just as likely to be consistent with innocent as unlawful behavior.” Id.
Next, Judge White rejected Plaintiffs’ plus factors based on Defendants’ participation in trade associations and industry conferences, explaining that Plaintiffs “do not describe any suspected or actual interactions between Defendants at these trade associations—not to mention interactions that suggest the establishment or confirmation of an agreement to unlawfully restrain trade.” Id. at 917-18. Rather, Plaintiffs’ allegations reflect only “an opportunity to collude, and an opportunity, without more, is insufficient to state a claim under § 1,” particularly given the fact that “trade associations often serve legitimate functions, such as providing industry information to members, conducting research to further industry goals, and promoting demand.” Id. at 918; see also id. (further rejecting allegation “that increases in DRAM prices correlate to certain trade meetings,” where Plaintiffs tied such increases to just four of the twenty plus pertinent meetings and failed to allege the significance of these meetings or that Defendants were even in attendance).
The Court also rejected plus factors based on Defendants’ public statements “during earnings calls or at industry conferences” that purportedly invited anticompetitive conduct and signaled continuing participation in the conspiracy. Id. at 918. Instead, the Court found that “Defendants’ statements amount to no more than descriptions of circumstances of their market,” not invitations to behave in a certain way, and thus that “Defendants’ behavior and statements are consistent with lawful conscious parallelism.” Id. at 919. Further, the public nature of the statements “weighs against their illegality,” although it “does not inoculate any underlying illegality.” Id. at 920.
Lastly, the District Court rejected Plaintiffs’ plus factors relating to deviation from past behavior and actions against self-interest. Id. While Judge White acknowledged that the alleged “supply reduction constituted a change in market behavior,” he noted “that deviation from past behavior is a poor plus factor because it merely relabels parallel conduct,” and the Court was “unable to infer, based on the allegations, that this change in behavior was nefarious.” Id. Similarly, the Court was not convinced that “Defendants acted against their self-interest” by “restricting their own output after learning about other output reductions,” because it was “a move that common sense suggests would raise prices,” and “[s]elling goods at higher prices can be in an entity’s best interest.” Id.
The sole plus factor that the District Court found “tips in favor of circumstantially alleging an unlawful conspiracy” related to Defendants’ historical behavior—specifically, the fact that “each of the Defendants have been involved in prior price-fixing cases regarding the DRAM market” and that “[e]ach Defendant pled guilty or cooperated in exchange for immunity, made specific admissions of guilt, paid large fines, and saw individual employees serve jail time.” Id. at 921 (but rejecting as unhelpful allegations of civil settlements, investigations not resulting in findings of fact or admissions, and foreign investigations or cases). Nevertheless, the Court held that “Plaintiffs cannot state a claim under the Sherman Act based solely on parallel conduct and past guilty pleas and admissions regarding anticompetitive behavior,” and thus dismissed Plaintiffs’ Sherman Act claim on this further basis. Id. at 922 (reiterating that Plaintiffs’ other purported plus factors merely reflect “the conscious parallelism endemic to an oligopoly” and “are just as consistent with innocent behavior as unlawful behavior”).
California and Other State Law Claims
With respect to claims under California law, the Court dismissed Plaintiffs’ Cartwright Act claim based on the parties’ agreement that it “stands or falls with their Sherman Act claim.” Id. at 922. Similarly, the Court dismissed Plaintiffs’ UCL claim because it was “based only upon Defendants’ unlawful anticompetitive behavior” and thus failed because “the Sherman Act and Cartwright Act violations are insufficiently pled.” Id. at 923.
The District Court also dismissed ten of Plaintiffs’ other state law claims on the basis that the Complaint was “devoid of any allegations concerning effects within these particular states.” Id. at 923-25 (rejecting Plaintiffs’ argument “that pleading a ‘national conspiracy’ that produced ‘increased prices in a given state’ is sufficient”). However, the Court strongly suggested that Plaintiffs would be able to rectify this issue in an amended complaint. Id. at 925 n.19 (“This is not to say that Plaintiffs must allege unique injuries or effects in each of the states whose antitrust laws are invoked. . . . Bare allegations can be sufficient, but they must be made.”).
Finally, the Court dismissed Plaintiffs’ claims under the Arkansas Unfair Practices Act and the Illinois Antitrust Act with prejudice because private rights of action are unavailable under those statutes, id. at 925-27, and dismissed Plaintiffs’ claim under the Florida Deceptive and Unfair Trade Practices Act for failure to satisfy the statute’s heightened pleading requirement, id. at 927-28. The Court declined to dismiss Plaintiffs’ claims under Arizona, New York, and Utah antitrust laws, rejecting Defendants’ argument that Plaintiffs were required to plead compliance with statutory notice requirements. Id. at 923 (calling for service of pre-suit notice on the states’ attorneys general).
In sum, the District Court’s opinion offers several key takeaways for antitrust practitioners. For one, it reinforces the fact that purchasers of end products containing allegedly price-fixed components must make detailed allegations connecting the end-product and component markets in order to sufficiently plead both Article III and antitrust standing. In addition, it adds to the weight of authority among District Courts in the Ninth Circuit that Article III standing to bring sister state claims is appropriately addressed at the pleading stage. Finally, it serves as a strong reminder that oligopolies “present a special problem under § 1 analysis: rational, independent actions . . . can be nearly indistinguishable from horizontal price fixing,” and thus that sufficiently alleged “plus factors are particularly important in oligopolistic markets.” Id. at 916-17 (internal quotation marks omitted).
Subsequent to the Court’s ruling, Plaintiffs filed a consolidated amended complaint on October 28, 2019 and Defendants once again moved to dismiss on November 19, 2019. Defendants’ motion is currently set to be heard on January 17, 2020.