Antitrust and Unfair Competition Law: E-briefs, News and Notes, June 2021

Anjalee M. Behti, Zelle LLP

The Sixth Circuit reversed a Michigan district court decision that allowed a putative class of purchasers of automotive anti-vibration rubber parts to maintain a direct purchaser case alleging price-fixing for the parts. In re Auto. Parts Antitrust Litig., No. 20-1599, 2021 WL 1940427, at *1 (6th Cir. May 14, 2021).  The three-judge panel ultimately centered its decision on the language in the settlement agreements.

Specifically, the panel addressed whether the Illinois Brick direct purchaser rule has any effect on the interpretation of an antitrust class action settlement under Michigan law.  Defendants argued Plaintiffs did not have direct purchaser standing because they settled all their claims as part of a class of indirect purchasers under the settlement agreements.  The court ruled in favor of Defendants, finding Plaintiffs’ argument that they purchased the auto parts “directly” from subsidiaries of a defendant manufacturer unpersuasive.

Background

Defendants’ appeal stems from litigation arising from the manufacture and sale of automotive anti-vibration rubber parts.  A putative class of end-payor purchasers sued several manufacturers and suppliers in 2013. The end-payor litigation settled in 2016 and 2017 for $80.4 million.  That settlement class excluded persons or entities who purchased parts directly or for resale. 

Prior to the district court’s entering of final judgments approving settlement agreements in the end-payor suit, three individual plaintiffs brought a putative class action against the same manufacturers and suppliers seeking money damages on behalf of all direct purchasers of anti-vibration rubber parts.  Plaintiffs alleged they purchased auto parts from a Firestone repair shop, which is owned by a subsidiary of one of the defendants, Bridgestone Corporation, in addition to two other retail shops which are allegedly related to Bridgestone.  Shortly after Plaintiffs filed their direct purchaser suit, the district court entered final judgments in the end-payor lawsuit, enjoining all settlement class members from bringing claims arising from or relating to the released claims.  One year later, Defendants sought to enjoin Plaintiffs from litigating their claims in the direct purchaser suit because the settlement agreements in the end-payor lawsuits prevented them from pursuing federal antitrust claims as indirect purchasers.  The district court denied Defendants’ motion, finding Plaintiffs had standing under the ownership or control exception to Illinois Brick.

“Clear and unambiguous” language of settlement agreements bars direct-purchaser suit

Focusing its analysis on interpretation of the settlement agreements, the panel considered whether the agreements bar Plaintiffs from maintaining their direct purchaser suit under Michigan law.  Interpreting the “clear and unambiguous” language of the settlement agreements, the panel found that the agreements “unambiguously” barred Plaintiffs from maintaining their direct purchaser suit. Auto Parts, 2021 WL 1940427, at *3 (citing Michigan Mut. Ins. Co. v. Dowell, 204 Mich. App. 81, 87, 514 N.W.2d 185 (1994)).  The settlement class definition explicitly excludes those that purchased auto parts “directly or for resale.” 

Plaintiffs alleged they purchased the parts from Bridgestone Retail Operations, LLC and other retailers, which purchased parts from Bridgestone Americas, Inc., which purchased from one of the named Defendants.  The panel found, by definition, Plaintiffs’ purchases were not direct.  The panel cited the Supreme Court’s recent Apple v. Pepper opinion, stating that “direct purchasers are those who buy ‘immediately from the alleged antitrust violators,’ and indirect purchasers are those ‘who are two or more steps removed from the violator in a distribution chain[.]’” Apple Inc. v. Pepper, 139 S. Ct. 1514, 1520 (2019).  Particularly in light of Plaintiffs’ concession that they did not purchase “immediately” from any of the named Defendants, the panel found that the indirect nature of the purchases barred Plaintiffs from bringing a direct-purchaser suit.

Ownership or control exception under Illinois Brick

Plaintiffs also urged for direct purchaser status under the ownership or control exception to Illinois Brick.  Under that exception, an indirect purchaser may bring a federal antitrust suit when a defendant owns or controls its direct purchaser. See Jewish Hosp. Ass’n of Louisville, Ky., Inc. v. Stewart Mech. Enters., Inc., 628 F.2d 971, 975 (6th Cir. 1980).  The panel rejected this argument, discerning that Plaintiffs’ argument answers a question of antitrust standing, “not a question that bears on our interpretation of the settlement agreements.” Auto Parts, 2021 WL 1940427, at *5.  It further noted, “[t]hat Plaintiffs might be considered to have standing under Illinois Brick does not alter the reality that they indirectly purchased anti-vibration rubber parts from Defendant Bridgestone Corporation.” Id.  The panel took its observation one step further – “By nevertheless claiming that the exception applies to them, Plaintiffs concede that they are in fact indirect purchasers. How so? Well, because the ownership-or-control exception applies only to indirect purchasers.” Id. (citations omitted). Further, the settlement agreements include several exclusions from the class-wide releases, namely, allowing certain indirect purchasers to bring federal antitrust claims against Defendants under certain state antitrust laws.  The settlement agreements do not list the ownership or control exception as an exclusion, thus definitively barring Plaintiffs’ attempt at direct purchaser status.

The panel rejects the district court’s finding of “other factors” in favor of Plaintiffs

The panel additionally rejected the district court’s findings that some “other factors” proved advantageous to Plaintiffs’ argument: Defendants’ failure to file a notice in the direct purchaser case that Plaintiffs’ claims were dealt with in the end-payor settlement agreements; Defendants’ failure to notify Plaintiffs of Defendants’ motion to enforce judgment; and that Plaintiffs’ claims would not be duplicative of the end-payor claims because they sought a different type of relief. The panel reiterated its focus on interpretation of the terms of the settlement agreements, ultimately disregarding these factors as unrelated to the plain meaning of the agreements.

Conclusion

The Sixth Circuit’s decision adds to ample case law applying a strict interpretation of the Illinois Brick direct purchaser rule. Where Plaintiffs did not purchase anti-vibration rubber parts directly from a named defendant, they lack standing to pursue a federal antitrust claim for money damages. Plaintiffs’ effort to find standing under the ownership or control exception to Illinois Brick also fell short as that exception is “ultimately a pragmatic carveout to a federal antitrust standing rule, not a redefinition of indirect purchaser.” Id.  The Auto Parts opinion is a reminder that where direct purchaser standing or an exception to Illinois Brick does not clearly apply and where the terms of the settlement agreement do not define “indirectly purchased” or “directly purchased,” a court is likely to turn to case law to resolve the issue – that is, evaluate the terms of the settlement agreements de novo.

Kerry C. Klein, Farmer Brownstein Jaeger Goldstein Klein & Siegel LLP

The Pennsylvania Supreme Court recently issued a decision addressing the following issue: “Are contractual no-hire provisions which are part of a services contract between sophisticated business entities enforceable under the laws of this Commonwealth?” Pittsburgh Logistics Sys. v. Beemac Trucking, LLC, No. 31 WAP 2019, 2021 Pa. LEXIS 1853 (April 29, 2021).  After a lengthy discussion of decisions of courts in other jurisdictions, the Pennsylvania Supreme Court answered the question of first impression “no” given the particular facts in the case before it. The court relied on recent statements by the U.S. Department of Justice indicating its position that naked no-poach agreements are per se violations of the Sherman Act.

FACTUAL BACKGROUND AND PROCEDURAL HISTORY

Pittsburgh Logistics Systems (“PLS”) is a third-party logistics provider that arranges for the shipping of its customers’ freight with selected trucking companies. Beemac Trucking (“Beemac”) is a shipping company that conducts non-exclusive business with PLS. Id. at *1. The contract between the two companies included both a non-solicitation provision and the no-hire provision that is the focus of the appeal. The no-hire provision provided:

CARRIER agrees that, during the term of this Contract and for a period of two (2) years after the termination of this Contract, neither CARRIER nor any of its employees, agents, independent contractors or other persons performing services for or on behalf of CARRIER in connection with CARRIER’S obligations under this Contract will, directly or indirectly, hire, solicit for employment, induce or attempt to induce any employees of PLS or any of its Affiliates to leave their employment with PLS or any Affiliate for any reason.

Id. at *2. After Beemac hired four PLS employees, PLS filed an action alleging breach of contract and other causes of action. The court issued a preliminary injunction enjoining Beemac from employing the former PLS employees. Id. at *3. In a related action, PLS sued its former employees for breach of contract, and the court in that case also issued a preliminary injunction preventing the former employees from working for Beemac.  Id. The court subsequently held a consolidated hearing on both actions. With respect to the PLS action against its former employees, the court ordered no injunctive relief for one of the employees, and enjoined the other three employees only from soliciting PLS clients in accordance with their employment agreements. Id. at *4. With respect to the PLS action against Beemac, the court first determined that the contractual provision governing non-solicitation of PLS customers was ancillary to the main purpose of the agreement, and was necessary to protect PLS’s interest in its customers. Id. at *5. In contrast, the court determined that the no-hire contracts are “void against public policy because they essentially force a non-compete agreement on employees of companies without their consent, or even knowledge, in some cases.” Id. at *6. Finding that PLS did not have a substantial likelihood of success on the merits, the court vacated the injunction prohibiting Beemac from hiring former PLS employees. Id. at *6-7.

PLS filed an appeal to the Superior Court, which issued an en banc opinion affirming the lower court’s ruling. The Superior Court agreed with the lower court that the no-hire provision violated public policy by preventing non-signatories (PLS employees) from exploring alternate work opportunities in a similar business. Id. at *7-8. The Supreme Court of Pennsylvania granted allowance of appeal to address the following issue: “Are contractual no-hire provisions which are part of a services contract between sophisticated business entities enforceable under the laws of the Commonwealth?” Id. at *9-10.

PENNSYLVANIA SUPREME COURT OPINION

Due to the lack of Pennsylvania case law governing no-hire provisions, the court reviewed decisions from other jurisdictions addressing similar provisions. Id. at *10. The court first summarized three decisions in which courts found such provisions unenforceable, including the California Court of Appeal’s decision in VL Sys., Inc. v. Unisen, Inc. In that case, VL Systems (“VLS”) was a provider of computer consulting services that entered into a contract with Star Trac to provide assistance for migrating to a new server. Id. at *13. The contract contained a provision that Star Trac would not attempt to hire VLS’s personnel during the term, or within 12 months, of the agreement.  Id. After the contract was completed, VLS hired a senior engineer, who a few months later accepted a position with Star Trac. Id. at *13-14. VLS filed an action against Star Trac in which the court entered judgment in favor of VLS. Id. at *14. The Court of Appeal reversed. It noted that, while courts have upheld narrowly drawn provisions which limit the employment mobility of nonparties, the contract at issue contained a very broad provision that applied to all VLS employees, regardless of whether they worked for Star Trac or were even employed by VLS at the time. Id. at *15. The Pennsylvania Supreme Court also summarized a Texas appellate court case and a Wisconsin Supreme Court decision holding that no-hire provisions are unenforceable.

The court also discussed three cases from other jurisdictions in which courts reached conclusions that the no-hire provisions presented by those cases were enforceable. Id. at *17-26. In all three cases, courts found that the no-hire provisions at issue were narrowly tailored to protecting the companies’ interest in retaining skilled workers, and did not substantially restrict employees’ opportunities to secure employment in their particular fields.

Against this background, the court analyzed the parties’ arguments. PLS argued that it had a legitimate business interest in protecting its employee assets from poaching by its business partners. Id. at *26. PLS explained that the no-hire provision was intended to disincentivize a carrier from “poaching that which PLS values most  – its employees, who by virtue of PLS’s involvement in training them, develop the specialized knowledge and expertise that makes them so attractive to one who might be inclined to transact business directly with a shipper.” Id. at *27. It also argued that the Superior Court erred by focusing on the interests of non-parties (PLS employees) who are only precluded from working for Beemac and are not barred from employment with any other entity in the trucking/logistics field. Id. at *28. PLS further asserted that the Superior Court erred in relying on VL Systems, arguing that the decision was not a per se rejection of no-hire provisions but rather was fact-specific. Id. at *31.

Beemac argued that the lower court correctly applied Pennsylvania law regarding restraints of trade in holding that the no-hire provision violates public policy. Id. at *32. Beemac also argued that the United States Department of Justice (“DOJ”) has recently taken a strong stand against no-hire provisions. Beemac noted that the U.S. District Court for the Western District of Pennsylvania relied on a statement of interest filed by the DOJ in determining that plaintiffs had sufficiently alleged that the no-poach agreements were a per se violation of the antitrust laws in In re Ry. Indus. Employee No-Poach Antitrust Litig., 395 F. Supp. 3d 464 (W.D. Pa. 2019). Id. at *34. Beemac further noted that the DOJ submitted a similar statement of interest in another case alleging that Duke University had entered into an unlawful agreement with the University of North Carolina to prevent lateral hiring of certain medical employees, in Seaman v. Duke University, 2019 U.S. Dist. LEXIS 163811 (M.D.N.C. Sept. 25, 2019). Id. That case resulted in a settlement that required a monetary payment and significant injunctive relief. Id. The Attorney General of the Commonwealth of Pennsylvania filed a brief supporting Beemac’s assertion that, along with the DOJ, several state attorneys general have actively focused on no-hire restrictions. Id. at *34-35.

The Pennsylvania Supreme Court reviewed the factual findings of the lower court deferentially while resolving issues of law de novo. Id. at *39. The court recognized that “Pennsylvania common law has treated restrictive covenants as restraints on trade that are void as against public policy unless they are ancillary to an otherwise valid contract.” Id. The court employed a balancing test to determine the reasonableness of the restraint in light of the parties’ interests that the restraint aims to protect and the harm to other contractual parties and the public. Id. at *40. The court relied on a “Rule of Reason” test for evaluating the reasonableness of ancillary restrains from the Restatement (Second) of Contracts:

(1) A promise to refrain from competition that imposes a restraint that is ancillary to an otherwise valid transaction or relationship is unreasonably in restraint of trade if

(a) the restraint is greater than is needed to protect the promisee’s legitimate interest, or

(b) the promisee’s needis outweighed by the hardship to the promisor and the likely injury to the public.

Id. at *40-41. The court noted that the reasonableness test set forth above is consistent with the DOJ’s guidance for human resource professionals, which explains that naked no-poach agreements are per se illegal. Id. at *41, n. 8. However, the DOJ advised that legitimate joint ventures are not per se illegal and has advocated for the rule of reason to apply to ancillary restraints on trade. Id.

In the case at hand, the court found that PLS had a legitimate interest in preventing its business partners from poaching its employees, who had developed specialized knowledge in the course of their employment. Id. at *41. However, the court determined that the no-hire provision was both greater than needed to protect PLS’s interest, and creates a probability of harm to the public. Id. at *42. The court specifically noted that the no-hire provision prevented Beemac from hiring or soliciting all PLS employees, regardless of whether the PLS employees had worked with Beemac during the term of the contract. Id. The court also recognized that the no-hire provision impairs the employment opportunities and job mobility of PLS employees, who are not parties to the contract, without their knowledge or consent. Id. Finally, the court found that, by undermining free competition in the labor market in the shipping and logistics industry, the no-hire provision creates a likelihood of harm to the general public. Id. at *43. The court therefore concluded that the no-hire provision unreasonably retrains trade and is therefore unenforceable. Id. at *44.

In  last month’s E-briefs, Lesley Weaver and Matt Melamed, Bleichmar, Fonti & Auld LLP covered this case, writing in part: “In Olean Wholesale Grocery Coop v. Bumble Bee Foods, 993 F.3d 774 (9th Cir. 2021), the Ninth Circuit vacated and remanded a district court order certifying three classes in an antitrust case involving an admitted price-fixing conspiracy by producers of packaged tuna.  Most notably, the panel stated that, in order for statistical evidence to establish Rule 23(b)(3) predominance, a district court must conclude the percentage of uninjured class members must be de minimis.  Olean, Slip Op. at 32. This high standard pushes class certification ever closer to demanding detailed discovery far beyond establishing mere predominance.  (here).

A Ninth Circuit judge has called for a vote on rehearing the appeal and the Court of Appeals had invited briefs on whether the entire court should review the case after a divided opinion mentioned above. “The parties are directed to file simultaneous briefs setting forth their respective positions as to whether this case should be reheard en banc. The parties should specifically discuss whether Federal Rule of Civil Procedure 23(b)(3) requires a district court to find that no more than a “de minimis” number of class members are uninjured before certifying a class.”   Id., Order, Case No. 19-56514, Dkt. Entry 101, (9^th Cir. April 28, 2021). 

Two public interest groups, the American Antitrust Institute and Public Citizen, among others, filed amicus briefs: AAI (here); Public Citizen. (here).