Antitrust And Unfair Competition Law E-Brief: April 2021

Diana Yen, UCLA 2022 J.D. Candidate, yen2022@lawnet.ucla.edu.

In an order and opinion denying a motion for preliminary approval of class action settlement, U.S. District Judge Charles R. Breyer of the Northern District of California found the proposed settlement in Arena v. Intuit Inc., Case No. 19-cv-02546-CRB, 2021 U.S. Dist. LEXIS 41994(N.D. Cal. Mar. 5, 2021) was not fair, reasonable, and adequate, and therefore did not satisfy Rule 23(e) of the Federal Rules of Civil Procedure, which requires the Court to approve class action settlements in light of due process concerns for absent class members. In particular, a court may give such approval “only after a hearing and only on finding that” the proposed settlement is “fair, reasonable, and adequate.” Fed. R. Civ. P. 23(e)(2).

The Court was especially wary of unequal treatment among class members, citing In re Bluetooth Headset Prods. Liability Litig., 654 F.3d 935, 946 (9th Cir. 2011), noting that pre-class certification settlements are subject to heightened scrutiny. Arena, 2021 U.S. Dist. LEXIS 41994 at *17. The Court noted that issuing such an injunction at the preliminary approval stage “would be an extraordinary measure best reserved for extraordinary circumstances,” citing 4 Newberg on Class Actions § 13:19 (5th ed. 2011). Id. at *19.

The Court did not consider whether it would be likely that the court would be able to certify the proposed class, or other like subsidiary issues. The Court found the proposed settlement award insufficient and opt out procedures unduly cumbersome and declined to approve the class settlement.

BACKGROUND

Intuit owns TurboTax, an online tax preparation service.Intuit agreed to provide low-income taxpayers and active military members the option to file their taxes for free in exchange for the U.S. government to not enter the tax preparation software and e-filing services market. Plaintiffs allege that instead of steering eligible taxpayers to its free-filing option, or simply letting customers find their way to it, Intuit misleadingly channeled free-filing eligible taxpayers to its paid services. Arena, 2021 U.S. Dist. LEXIS 41994 at *2.

On November 12, 2020, Plaintiffs moved for preliminary approval of a settlement agreement with Intuit. Id. at *3. Under the proposed settlement, Intuit would pay a fixed sum approximately $28 million ($40 million adjusted for expenses) to settlement class members who must sign an attestation that they paid a fee to Intuit when they “expected” to file for free. Id. at *4.

On Oct. 28, 2019, Intuit moved to compel arbitration, which the Ninth Circuit has granted. Thus, the proposed settlement comes in the context of tens of thousands of Intuit customers who have already begun individually arbitrating analogous claims against Intuit, bearing significant financial consequences for Intuit. Id. at *6.

On October 28, 2020, the arbitration claimants asked the Superior Court to enjoin Intuit from agreeing to a settlement with Plaintiffs that includes the arbitration claimants and that burdens their right to opt out. Before the Superior Court ruled on that motion, Intuit and Plaintiffs’ counsel agreed to a preliminary settlement, and Plaintiffs’ counsel filed the Motion for Preliminary Approval at issue here.

In addition to Intuit’s deal with the U.S. government, in particular, the I.R.S., the ongoing arbitrations, and current proceeding, there is also a possibility that there will be a government enforcement action against Intuit. Thus, the members of the proposed class include the arbitration claimants, those who may recover via a government enforcement action against Intuit, and the rest of the class. Plaintiffs had moved for class certification in January 2020, but the Court is yet to certify any class in relation to this case. Id. at *3.

THE PROPOSED SETTLEMENT AWARD

The proposed settlement would provide $28 million in monetary relief in addition to injunctive relief for claimants in the case at hand. The Court provided a rough calculation of $1.9 billion as a conservative estimate of Intuit’s potential liability for a projected class of 19 million people, who paid an average of $100 per-year for at least one year. The proposed recovery would constitute just 28% of damages for class members who paid to file for one year, and less for those who paid to file for multiple years. In light of these facts and the fact that the proposed settlement would bar arbitration and other parallel proceedings arising from the same claims and may preclude participation in state enforcement actions, the Court deemed the proposed settlement award inadequate. Similarly, the Court was unable to conclude that the compensation is adequate relative to Intuit’s potential exposure, in part due to Plaintiff’s failure to provide a definite estimate of that exposure.

The Court wrote that because Intuit is a massive company that dominates the tax-filing space, it has no excuse, financial or otherwise, for undercompensating the class to avoid facing claims in arbitration. Moreover, mostly low-income class members suffered at least $100 in damages, with some paying much more over the course of several years. Because these sums might be the difference in whether someone can pay rent for a month or buy groceries for a week, the Court emphasized that the harm here was significant.

The Court also wrote that the proposed settlement fails to account for obvious and important differences among large groups of class members, namely that some have paid fees over multiple years, some have already paid arbitration fees. These members would receive the same award as members not similarly situated. The Court acknowledged that the proposed settlement would secure what Plaintiffs characterize as “very important injunctive relief” for the class but wrote that the proposed settlement’s injunctive relief for the class cannot overcome these inadequacies, and the Court may not trade-off the interests of some class members (i.e., those participating in the present proceedings) for others (i.e., those not participating).

THE PROPOSED OPT OUT PROCEDURES

The Court also concluded that the proposed opt out procedures were unduly burdensome. The proposed settlement required class members to opt out by mailing a hard copy letter with a “wet-ink” [signed in ink] signature. The court considered this to be burdensome, especially considering that Intuit can administer settlement claims electronically, and for tens of thousands of class members who are arbitrating claims against Intuit, opting out is the obvious financial choice.

The Court wrote that the proposed settlement’s primary effect on arbitration claimants is to stall their arbitrations until they comply with the proposed opt out procedures. The arbitration claimants would be subject to an immediate injunction and must opt out of the settlement to continue pursuing their arbitration claims. The Court noted it would be irrational for claimants with legitimate claims to opt for the proposed $28 recovery, especially given Intuit’s weak bargaining position in the arbitration proceedings. Moreover, because the Ninth Circuit has held that Plaintiffs’ claims against Intuit must be arbitrated, there is no realistic way for the rest of the class members to recover in Court or as a class except via settlement. Under the proposed settlement, these class members could either submit a claim, opt out and pursue individual arbitrations, or get nothing. The Court also took into consideration that there are class members who may recover via government enforcement actions against Intuit.

CONCLUSION

As noted, the Court found that the proposed class settlement amount was inadequate.  In addition, the Court was not willing to approve a settlement which would effectively “halt all parallel proceedings until class members complied with the onerous op out procedures described above.” Arena, 2021 U.S. Dist. LEXIS 41994 at *19.  The Court concluded that “although enjoining parallel proceedings may ultimately be necessary to achieve a global resolution of this controversy, the Court declines to do so at this stage, in these unique circumstances.” Id. at *20.

Anthony Leon in-house counsel

In a recent order, Judge Anne-Christine Massullo of the San Francisco Superior Court granted a motion for preliminary approval of Sutter Health’s $575 million settlement in the long-standing antitrust class action intended by the UFCW & Employers Benefit Trust (UEBT) and the State of California, UFCW & Employers Benefit Trust v. Sutter Health, et al., Case No. CSG 14-538451 (Cal. Sup. Ct. San Francisco. Cnty, 2021). The approval comes more than a year after the parties reached a settlement, as the Court originally denied it due to concerns over the settlement monitor’s selection process.

In 2014, the UEBT filed an antitrust class action against the Northern California healthcare provider Sutter Health. The plaintiffs alleged that Sutter Health entered into anticompetitive contracts with network vendors resulting in overcharges by its hospitals, in violation of California’s antitrust and unfair competition law. The State of California initiated its case against Sutter Health in 2018, which was then consolidated with UEBT’s case. Originally scheduled for a three-month jury trial starting in late 2019, the parties made public days before the trial of their intention to settle. The settlement was finalized in December 2019.

In the course of reaching an agreement, the parties also searched for a settlement compliance monitor. Both parties looked for candidates and selected a small pool of fifteen potential candidates using criteria such as: antitrust and healthcare knowledge and experience, lack of actual or potential conflicts of interest, ability to be impartial based on prior experience and or current professional relationships, and reputation for effectiveness, fairness, and good judgment. The parties narrowed down the list to five candidates, whose application was then individually solicited. All of these candidates were White men. In the meantime, Defendant’s attorney kept searching for potential monitors and found Ms. Dionne Lomax, a Black woman. Ms. Lomax, who was solicited after the five other candidates, did not apply as she thought she would not have the resources required for a lead position. She ended up being on the team of another candidate, Mr. Jesse Caplan. Mr. Caplan’s team was then designated by both parties to be the monitor.

Plaintiff filed a motion for preliminary approval of the class action settlement in December 2019. Mr. Caplan’s appointment as a monitor was part of the settlement. Due to the pandemic, the hearing originally continued for April 6, 2020, was postponed to August 12, 2020.

THE IMPORTANCE OF DIVERSITY IN SELECTING A CLASS SETTLEMENT MONITOR.

On September 22, 2020, Judge Massullo denied the motion for preliminary approval of the class action settlement due to concerns regarding the selection process that led to Mr. Caplan’s appointment, Case No. CSG 14-538451 (Cal. Sup. Ct. San Francisco. Cnty, September 22, 2020). The Court considered that the process used to select the monitor was “unreasonable and contrary to public policy,” Id. at 1. Specifically, the Court found the process to be limited and confidential: in a concise period, only candidates that were solicited have been considered, Id. at 2. As such, Ms. Lomax, who was solicited after the five other candidates—including a man from her organization—and only a few days before the end of the selection period, did not have a fair opportunity to be the monitor, Id. at 9. The Court, in general, regretted the lack of diversity in the selection process, an issue already seen in litigation teams appearing before it, Id. at 9.

There is no legal standard to evaluate the appointment of a class settlement monitor. The guidance published by the American Bar Association and the U.S. Department of Justice develop criteria such as experience, credibility, integrity, relevant skills, costs, etc. These criteria should be used with caution, as much as reputation or prior monitor experience, as they tend to go against diversity. They perpetuate an all-white-men circle of candidates. In Judge Massullo’s words, “[d]iverse candidates are not prohibited from applying, but they are often found to lack the ‘experience’ or ‘resources’ that white male candidates possess on paper, and thus are weeded out of the process before getting even an opportunity to establish themselves,” Id. at 9. Further, “the idea that in 2020 there are only five white men in the United States who are qualified to be interviewed for this position is anathema to what are today basic notions of fairness, equity, and justice,” Id. at 9.

Diversity should be integrated into the selection of a class settlement monitor. This is especially relevant when the People are part of the class action. It is indeed in the public interest to have a selection process that reflects the whole class. There must be public confidence in the monitor selection. As such, parties should use objective criteria in selecting the monitor. 

In this case, the Court questioned the objectivity of the selection process and invited the parties to work on it before the settlement’s preliminary approval. 

THE WELCOMED USE OF AN OBJECTIVE SELECTION PROCESS

In March 2021, the Court granted the motion for preliminary approval of the class settlement, including the appointment of Ms. Dionne Lomax as the monitor. During the hearing, Judge Massullo declared she was “very impressed by the second round of interviews of monitors,” Case No. CSG 14-538451 (Cal. Sup. Ct. San Francisco. Cnty, March 10, 2021)

In an affidavit filed in support of the motion, Malinda Lee, Deputy Attorney General within the Health Rights and Access (HRA) Section of the Office of the California Attorney General (AGO), gave a detailed description of the new selection process. During an initial 45-day period request for proposal, the parties publicly called for candidates. The request was circulated to more than 650 recipients and on social networks. After six separate inquiries, the parties received twelve proposals coming from across the country by December 10, 2020. All the proposals were thoroughly reviewed, and the absence of prior experience did not lead to immediate rejection. The applicants were all from various professions, including law, investigations, alternative dispute resolution, consulting academia, and monitoring. Per Melinda Lee, “over 75% of the applicants consisted of proposed lead or co-lead monitors who were people of color and/or women, LGBTQ or some combination thereof,” Affidavit at 5. From this pool of twelve applicants, each party advanced three candidates. Both parties selected Ms. Lomax, and the five other candidates have been interviewed. The parties narrowed down the six candidates to two, one of which being Ms. Dionne Lomax. In Lomax’s team was included Mr. Caplan, who was interviewed individually regarding his prior proposal in 2019. Following an interview of both final candidates, the Plaintiffs and Defendants agreed to appoint Ms. Dionne Lomax as monitor, Settlement at 24. 

CONCLUSION

This case should encourage parties of a class action settlement to select a monitor using criteria promoting diversity. Fairness, equity, and reasonableness should guide parties during the selection process, which should be as objective as possible. As noted by the Court, an objective and diverse selection process is in the public interest.

The $575 million settlement reached by both parties requires Sutter Health to be monitored for a period that could go up to thirty years. While Sutter Health does not admit guilt, the settlement will ensure that insurers, employers, and self-funded plans will receive details regarding Sutter Health’s services’ quality and pricing. 

Bob Connolly, Law Office of Robert Connolly

The Federal Trade Commission filed an administrative complaint and authorized a federal court lawsuit to block Illumina’s $7.1 billion proposed acquisition of GRAIL, Inc. (Grail) Grail produces of a non-invasive, early detection liquid biopsy test that can screen for multiple types of cancer in asymptomatic patients at very early stages using DNA sequencing. This early detection may revolutionize cancer treatment.  Illumina is the only provider of DNA sequencing that is a necessary input to produce these multi-cancer early detection, or MCED, tests in the United States.  Illumina and Grail do not compete with each other, so this is not a horizontal merger. Grail, however, does compete with other companies also trying to produce MCED tests.   The FTC’s concern is that after purchasing Grail, Illumina could impede Grail’s competition from MCED producers by raising their input price, denying them technical assistance or crimping ther ability to compete in other ways by controlling a critical input.  A copy of the FTC press release is here.  A copy of the Redacted Public Complaint is here.

The complaint alleges the proposed acquisition will diminish innovation in the U.S. market for MCED tests, which could be used to detect up to 50 types of cancer. Most of these types of cancer are not screened for at all today, and the MCED test could save millions of lives around the world. The trial is scheduled to begin on Aug. 24, 2021.

The Complaint is of particular interest because it does not challenge a horizontal merger.  It is another in a recent series of merger challenges where the federal government has challenged “nascent” mergers. The relevant market alleged is MCED tests.  Rather than waiting for cancer to arise, MCED tests use a “liquid biopsy to examine fragments of DNA in the bloodstream to determine whether cancer cells have shed any DNA.  Grail, with its Galleri MCED test, is racing against several other firms to develop and ultimately commercialize this revolutionary technology.” Complaint at ¶4.  Illumina is a dominant provider of NGS platforms, an essential input for the development and commercialization of MCED tests. Grail’s Galleri test, along with its rivals’ MCED tests in development, must and do rely on Illumina’s NGS platforms. Id. at ¶6.

The FTC found the competitive harm in this proposed acquisition in that if Illumina owned Grail, as the only supplier of a critical MCED test input, Illumina could impede the competitiveness of any rival MCED test developer by 1) raise the test developers prices for necessary inputs; 2) deny important mechanical assistance; or 3) refuse or delay the execution of necessary licenses.  If the Acquisition is consummated, the FTC alleges that Illumina will gain the incentive to foreclose or disadvantage firms that pose a significant competitive threat to Grail and to limit the competitiveness of any MCED product that Respondents expect to compete closely with Galleri.  Post-Acquisition, Illumina will have the ability to monitor each company developing an MCED test using its NGS platform and the incentive to kill or disable any products that appear likely to take significant business away from Galleri.  Id. at ¶¶11-14.  The Acquisition, if consummated, would be likely to lessen competition substantially in interstate trade and commerce in the market for MCED tests throughout the country in violation of Section 7 of the Clayton Act, 15 U.S.C. § 18. 

The proposed merger is not a horizontal merger of competitors, the type that typically are challenged if concentration levels are deemed by the agency to create competitive concerns.  In a press release, Illumina stated that “The FTC’s challenge to the proposed transaction is a marked departure from longstanding antitrust precedent.”   Illumina’s press release further states: “that it disagrees with, and will oppose, the U.S. Federal Trade Commission (FTC)’s challenge to its previously announced acquisition of GRAIL, a pre-commercial company founded to accelerate early screening of cancer. Illumina will pursue its right to proceed with the transaction, the impact of which would accelerate the adoption of a breakthrough multi-cancer early detection blood test.”

The acquisition parties have 14 days to file and answer to the complaint. An evidentiary hearing before an Administrative Law Judge of the Federal Trade Commission is set for August 24, 2021. 

An interesting sidenote to the case is that Illumina formed Grail in 2015 before spinning it off two years later.  Had Illumina not spun of Grail. Of course, there would be no acquisition to challenge.

Note:  On April 1, 20201 Illumina agreed to delay closing its acquisition of Grail until at least September 20, 2021 or after 11:59 p.m. on the second business day after the court rules on the FTC’s move for a preliminary injunction blocking the merger, whichever comes first.

Bob Connolly, Law Office of Robert Connolly

In this action, Complete Genomics, Inc, (CGI”) alleged that Illumina improperly asserted three patents against it in the related action Illumina v. BGI Genomics Co., No. 3:20-cv-01465-WHO (N.D. Cal., filed Feb. 27, 2020) (“Infringement Action”) in an “unlawful, anticompetitive manner.”  CGI’s first primary allegation of anticompetitive conduct in this action relies on the assertion that two of the patens asserted in Illumina’s Infringement action against CGI are invalid and were improperly obtained by Illumina through a fraud on the Patent Office–often called a Walker Process fraud claim.  Complete Genomics, Inc. v. Illumina, Inc., Case No. 21-cv-00217-WHO, (N.D. Cal., March 30, 2021) (“CGI Stay”) at *2-3.

CGI’s second primary allegation of anticompetitive conduct is that Illumina’s assertion of U.S. Patent No. 10,480,025 (“the ’025 patent”) against its CoolMPS technology in the Infringement Action is objectively and subjectively baseless and constitutes sham litigation because “it is objectively apparent to one of ordinary skill in the art that CoolMPS’s antibody with a fluorescent molecule and the [’025 patent’s] claimed detectable label attached to the base of a nucleotide via a cleavable linker are substantially different.” Id. at *3-4.

Based on these allegations, CGI brought claims for monopolization and attempted monopolization under Section 2 of the Sherman Act, as well as unfair competition claims under California Business & Professions Code § 17200.

Illumina moved to stay CGI’s action arguing the claims are derivative of the issues already pending in the Infringement action which is much further long.   Illumina argues there is no prejudice to CGI because its claims are dependent on a favorable outcome in the Infringement Action.  CGI Stay at *4.

LEGAL STANDARD

In assessing whether a stay is appropriate in a particular action courts generally consider the following factors: “[1] the possible damage which may result from the granting of a stay, [2] the hardship or inequity which a party may suffer in being required to go forward, and [3] the orderly course of justice measured in terms of the simplifying or complicating of issues, proof, and questions of law which could be expected to result from a stay.” CMAX, Inc. v. Hall, 300 F.2d 265, 268 (9th Cir. 1962). CGI Stay at *4.

JUDGE ORRICK’S ANALYSIS

Judge Orrick fund that a stay of this action was appropriate pending resolution of the Infringement Action based on judicial economy, prejudice to Illumina and lack of prejudice to CGI.

I. JUDICIAL ECONOMY

The Court noted that CGI’s claims are based on two basic theories, both to which are subject to the Infringement action.  “If these issues are resolved in Illumina’s favor in the Infringement Action, CGI’s antitrust claims would likely be mooted or unviable. A mixed resolution of these issues, or a decision in CGI’s favor, could narrow or focus the remaining issues for the antitrust litigation.”  The Court agreed with and cited several cases where judicial efficiency merited staying antitrust claims pending the resolution of related patent claims. See Chip-Mender, Inc. v. Sherwin-Williams Co., No. C 05-3465 PJH, 2006 WL 13058 (N.D. Cal. Jan. 3, 2006) (staying antitrust claims and noting that resolution of patent issues might “dispose of the antitrust counterclaims altogether); ASM Am., Inc. v. Genus, Inc., No. 01-2190 EDL, 2002 WL 24444, at *6 (N.D. Cal. Jan. 9, 2002) (“It is common practice in federal court to stay antitrust counterclaims until after the trial” of related patent claims). CGI Stay at * 5.

CGI asserted that a stay would be improper because the Seventh Amendment right to a jury trial requires that its legal Walker Process claim in the antitrust action be determined before its inequitable conduct defense in the Infringement Action.  While CGI cited a number of cases in support, Judge Orrick noted “These cases all address circumstances where both equitable and legal claims were pending in the same action, which is a distinction from the circumstances here, where the claims are pending in separate actions filed a year apart.”  The Court cited the Supreme Court: The Supreme Court has held that the resolution of an equitable claim may have preclusive effect on a subsequent legal claim brought in a separate action and that such an outcome does not violate the Seventh Amendment. See Parklane Hosiery v. Shore, 439 U.S. 322, 337 (1979); B & B Hardware, Inc. v. Hargis Indus., Inc., 575 U.S. 138, 150 (2015) (“As to the Seventh Amendment, for instance, the Court has already held that the right to a jury trial does not negate the issue-preclusive effect of a judgment, even if that judgment was entered by a juryless tribunal.”). CGI Stay at *6

The Court rejected CGI’s arguments in support of a stay finding “The Infringement Action is considerably more advanced, there are no discovery efficiencies to be gained by moving forward in tandem, and resolution of the Infringement Action may substantially narrow or moot the claims in this action.” Id. at *8.

II. PREJUDICE TO ILLUMINA IF CASE PROCEEDS

The Court noted that the cost of defending a suit, even an expensive antitrust suit, is not on its own prejudicial but agreed with Illumina “that proceeding with the antitrust action now could force the parties to engage in expensive, time-consuming, and potentially pointless antitrust discovery.”  Id. at *9.

III. PREJUDICE TO CGI IF CASE IS STAYED

CGI argued that a stay would prolong Illumina’s antitrust conduct.  But the Court countered that it is the Court’s preliminary injunction in the Infringement Action that prevents CGI from selling CoolMPS in the US market, and resolution of that action, which is much farther along procedurally, will address the coemption issue.  Id. at 8-9. CGI also complained about possible loss of evidence as a result of the stay, but the Court found this complaint too general. Id. at *9-10.

Based on the above legal standard and the Court’s findings, Illumina’s motion to stay was granted pending resolution of the related Infringement action.