Antitrust and Unfair Competition Law Section: E-Briefs, News and Notes-September, 2021

A reminder for affiliated companies that the joint-client privilege is narrowly construed.

By Anthony Leon

On August 9th, 2021, the Honorable United States District Judge Chad F. Kenney granted in part Suzanne Somers and SLC Sweet, Inc.’s motion to compel, ordering QVC, Inc. to produce certain communications judged improperly withheld on the basis of the attorney-client privilege. Suzanne Somers, et al. v. QVC, Inc., Case 2:19-cv-04773-CFK (E.D. Pa, August 9th, 2021)

The order came in the context of an antitrust, misrepresentation, and breach of contract dispute brought by Suzanne Somers and SLC Sweet, Inc. (Plaintiffs) against QVC, Inc (Defendant). Plaintiffs argue QVC—together with the recently acquired HSN—purposefully plotted Plaintiff’s removal from the dietary supplements market.

American celebrity and businesswoman Suzanne Somers owns SLC Sweet, Inc., a company in the business of health and wellness products such as dietary supplements. Their products were made available through various retail channels, including the internet and television shopping network Evine. In March 2017, Evine’s rival and television shopping network leader QVC entered into an agreement with Plaintiffs for QVC to purchase, market, and sell Plaintiffs’ products. The deal grants QVC an exclusive right to “promote the products through direct response television programs,” as well as stipulates a non-compete clause, Case 2:19-cv-04773-CFK, Exhibit A, at 2, 7.

However, subsequent events led Plaintiffs to believe that QVC, at the time of the agreement, had no interest in honoring the contract. Instead, Plaintiffs allege QVC only entered into the agreement to remove Plaintiff from the dietary supplements market. 

Indeed, before entering into this agreement, QVC’s parent channel Qurate Retail Group initiated negotiations to acquire QVC’s rival home shopping space HSN, where Plaintiffs’ successful competitor Andrew Lessman was the exclusive dietary supplements vendor. Together, not only QVC and HSN would control about 95% of the direct response television programming market, but QVC would also be able to partner with Lessman and sell their dietary supplement. The acquisition occurred in July 2017.

Plaintiffs believe QVC and HSN knew about Qurate’s intention to acquire HSN before QVC contracted with Plaintiffs. Signing this agreement would ensure Plaintiffs would not be able to sell their products through a separate channel. To further attest these allegations, Plaintiffs allege QVC added restrictions on their products that were not applied to competitor Lessman. Due to these restrictions, Plaintiffs claim QVC intentionally breached the contract in several instances. All in all, Plaintiffs believe their deal with QVC was solely intended to benefit Lessman and damage his competitors.

Plaintiffs filed a complaint against Defendant in October 2019 for breach of contract, violation of the UCC, violation of the California Unfair Competition Law, fraud, intentional interference with contractual relations, and violation of Section 2 of the Sherman Act.

During discovery, Plaintiffs sought to establish QVC and HSN’s anticompetitive behaviors through communications between employees of each organization. Specifically, Plaintiffs sought to obtain from Defendant disclosure of two series of communications: (1) communications by and between HSN’s in-house counsel Mr. Gassett, and employees of QVC, about HSN’s contract with Mr. Lessman; and (2) communications from QVC attorney Mr. LaMonaca and employees of HSN pertaining to compliance with regulations and assessment of legal risks associated with approving on-air claims for the Plaintiffs’ nutritional supplements. Defendant argues these communications are protected by attorney-client privilege, which is also confirmed by their “Affiliate Company Shared Services Agreement.” Suzanne Somers, et al. v. QVC, Inc. at 2.

As Defendant refused to produce the communications they claim are privileged, Plaintiffs filed in May 2021 the present motion to compel. They request the Court to order Defendant to produce these communications. On August 9th, 2021, the Court granted in part the motion to compel, only requesting select communications to be produced to Plaintiffs.

Communications between a company’s counsel and its sister company’s employees are privileged if they were about a shared legal interest.

The Court reminded the four elements required for a communication to be privileged “: (1) a communication, (2) made between an attorney and client, (3) in confidence, and (4) for the purpose of obtaining or providing legal assistance for the client.” Id. at 6. Although the privilege is waived when the communication is shared with a third party, an exception to this rule can apply when the third party is a “joint-client.” This situation occurs when a single legal department represents affiliated companies, for example, when a parent’s legal department also represents its subsidiaries. Id. at 6. But the Court reminded that this joint-client privilege can only apply if the parties can show that the communication is “predominately of a legal character,” and the clients “share a common legal interest.” In other words, if the communication is not about a legal interest, or if the legal interest is not shared between the entities, then the privilege would not apply. Id. at 6.

Here, the Court found that only one of the two series of communications Plaintiffs requested to be produced is protected by the joint-client privilege. Id. at 8. The Court considered that communications from Mr. Gassett—HSN’s counsel—to QVC employees about HSN’s contract with Mr. Lessman are not protected by the joint-client privilege. Defendants have failed to show a common legal interest in knowing that a sister company complies with its contracts. While this may be a business interest for sister companies, this is not a legal interest. Therefore, even if the companies have a private agreement that stipulates they share legal representation, communications that pertain to business interests are not protected by the attorney-client privilege. The Court, however, found that the second series of communications involving QVC attorney Mr. LaMonaca and employees of HSN should be protected by the attorney-client privilege. Affiliated companies have a legal interest in knowing each of them is complying with the law. They also have a shared legal interest in communicating about defense in potential litigation. Because this second series of communications were related to compliance with regulations and assessment of legal risks associated with approving on-air claims for the Plaintiffs’ nutritional supplements, they are privileged. Id. at 9.

Plaintiffs failed to show Defendant waived the privilege.

In Rhone-Poulenc, the Third Circuit found that a party can have waived the attorney-client privilege by asserting defenses that put the attorney’s advice in issue in the litigation. Rhone-Poulenc Rorer Inc. v. Home Indem. Co., 32 F.3d 851, at 863 (3d Cir. 1994). This occurs, for example, if the client places at issue its counsel’s advice attempts to prove a claim or defense by disclosing or describing an attorney-client communication.

In this case, the Court found that the two elements Plaintiffs used to support their claim that Defendants waived the privilege were not sufficient at this point in the litigation. They speculated that “QVC will argue at trial that the claims review process was done in good faith,” using Mr. Gassett’s declaration that he “did his job in good faith” and that he did not use the claims review process to keep Plaintiffs’ products off the air. Id. at 10. However, for the privilege to be waived, the party invoking it must take an “affirmative step” in the litigation to place the attorney’s advice at issue. In this situation, Defendant has yet to assert a good faith or reliance on counsel defense. As a result “unless Plaintiffs can bring forward citations to the record showing that Defendant put Mr. Gasett’s conduct in the claims review process at issue as a defense, Defendant has not waived privilege at this time.” Id. at 11.

The Court finally notes if Defendant wanted to assert a good faith defense or reliance on advice of counsel, they have ten days to indicate it to the Court. Indeed, asserting such defenses would put advice of counsel at issue and waive the privilege over Mr. Gassett’s communications regarding the claims review process.  Id. at 12.

Conclusion

At this point of the litigation, the Court only granted the motion in part. Documents that were improperly withheld must be produced. This order should remind affiliated companies not to rely on a private services agreement they may have to ensure their communications are privileged.

On August 24th, the Court denied Plaintiffs’ motion for summary judgment on their breach of contract claim against Defendants, as well as Defendants’ motions for summary judgment on claims of fraud, breach of contract, interference with contracts, violations of the UCC. Judge Kenney will be deciding Plaintiffs’ motions for summary judgment on the antitrust and unfair competition claims on September 20th.

This is an important case to review for anyone contemplating suing Chinse companies for price-fixing.  After a very lengthy history, including a trip to the Supreme Court, the plaintiffs will not be able to collect damages awarded by a jury. The Second Circuit held:

“Applying the Supreme Court’s instructions, we conclude once again that this case should be dismissed on international comity grounds. Giving careful consideration but not conclusive deference to the Ministry’s views, we read the relevant Chinese regulations—as illuminated by contemporaneous administrative documents and industry reports—to have required the defendants to collude on Vitamin C export prices and quantities as part and parcel of China’s export regime for Vitamin C. Balancing this true conflict between U.S. and Chinese law together with other established principles of international comity, we decline to construe U.S. antitrust law to reach the defendants’ conduct.”

Animal Science Products, Inc. v. Hebei Welcome Pharma Co. Ltd., North China Pharmaceutical Group Corporation,  Case No. 13-4791 (2d Cir. August 8, 2021)(hereinafter “Animal Science”

at 2-3.

The parties agreed that the alleged Vitamin C price fixing actually occurred.  The corporate defendants that went to trial (other defendants settled) argued that Chinse export laws required the Chinese companies to agree on Vitamin C export prices.  Defendants claimed that the case was, therefore, barred by international comity because Chinese law made it impossible for the defendants to comply with US antirust laws.  The question was whether Chinse law in fact made it impossible for the defendants to comply with U.S. antitrust law, such that a so-called “true conflict” existed. Animal Science at 4.  The Second Circuit concluded that a “true conflict” did exist and in light of this conflict, the court applied “principles of international comity to balance the United States’ interest in the enforcement of its antitrust laws abroad against the international comity concerns implicated when those laws conflict with the laws of China. We conclude that principles of international comity required the district court to dismiss this action.” Id. at 5.

Plaintiffs filed their price fixing action against four Chinse companies in 2005.  Defendants moved to dismiss based on the foreign sovereign compulsion doctrine, the act of state doctrine, and principles of international comity.  China’s Ministry of Commerce (the “Ministry”) filed an amicus curiae brief and several other submissions in support of the motion to dismiss.  The district court determined that there had been no foreign sovereign compulsion because the defendants’ anticompetitive conduct was voluntary, not compelled, and the defendants had not shown that they faced a risk of severe sanctions for noncompliance. 

The Second Circuit  reversed, finding that the district court erred, or “abused its discretion,” by failing to abstain on international comity grounds in light of the Ministry’s submissions showing a true conflict between U.S. antitrust law and Chinese export regulations for Vitamin C. In re Vitamin C Antitrust Litig., 837 F.3d 175, 189 (2d Cir. 2016). In this first review of the case, The Second Circuit held that when a foreign government directly participates in U.S. court proceedings by providing an official representation regarding the proper interpretation of its laws, the U.S. court is bound to defer to that interpretation so long as it is reasonable under the circumstances.  The Supreme Court reversed, holding that the Second Circuit gave too much deference to the Ministry’s submissions, and remanded to the circuit court to carefully consider the Ministry’s views without giving them dispositive effect. Animal Sci. Prods., 138 S. Ct. 1865, 1873 (2018).

Considering the case again, the Second Circuit found that a “true conflict between Chinese and US law existed and the district court should have dismissed this antitrust action based on international comity. Animal Science at 10.  The interest of the Chinse government in regulating its economy outweighed the interest  of the United States in enforcing its antitrust laws. Id. at 12.

The Second Circuit applied a multi-factor balancing test, mindful of the Supreme Court’s’ explanation in Hartford Fire that, to warrant dismissal on the basis of international comity, the two countries’ legal demands must be irreconcilable. The Court reviewed the history of Chinese export regulations regarding Vitamin C, including the submissions by the Chinese government, id. at 23-53, and concluded “[t]aking Chinese law at face value, and having given careful consideration to the Ministry’s statements about what the applicable laws required, we conclude that defendants were required to engage in price-fixing conduct violative of U.S. antitrust law.” Id. at 53.

Other factors weighed by the Second Circuit in upholding its finding that international comity precluded the price fixing action are:

            1.          Nationality of the Parties and Site of the Anticompetitive Conduct

            2.         Effectiveness of Enforcement and Alternative Remedies

            3.         Foreseeable Harms to American Commerce

            4.         Reciprocity

            5.         Possible Effect upon Foreign Relations

Id. at 56-63.

The Second Circuit also considered that the Department of Justice had not brought a criminal action against the defendants who conceded price fixing. The court also noted the US had other possible remedies such as the World Trade Organization or diplomatic efforts. 

Conclusion

The Second Circuit concluded “While the stakes are high for both countries, we conclude that the United States’ concern with extraterritorial enforcement of a private civil judgment under its antitrust laws is substantially diminished in these circumstances. In light of these considerations of international comity, we do not construe the Sherman and Clayton Acts to reach the present controversy.”  Id. at 65-66.

This case involved a challenge to a National Association of Realtors (NAR) rule that prevented its subscribers from withholding available properties from the listing service.  In essence, if subscriber realtor was marketing a property in any way, that realtor needed to include that listing on the local MLS listing service so that all other agents could see it.  Failure to do so would result in losing access to the listing service.  A relatively new company called Top Agent Network (“TAN”) offers a competing listing service. But it only makes the service available to a small minority of agents—ones that the company has deemed “top agents.” These TAN members are also subscribers to NAR’s listing service.  TAN wanted its members to be able to list properties on its own service without also being required to list them on NAR’s service.  TAN filed a Sherman Act “group boycott” suit claiming that NAR’s policy violates the antitrust laws.  The suit was dismissed with prejudice: “although the policy presumably causes real estate agents to be less interested in using TAN’s service and becoming TAN members, this is not the type of harm that the antitrust laws are designed to prevent.” Top Agent Network, Inc. v. Nat’l Ass’n of Realtors, 20-cv-03198-VC (N.D. Cal. Aug. 16, 2021)(hereinafter “Top Agent”) at 2.

TAN is comprised of “elite” realtors and homeowners who prefer not to broadcast the fact that they are selling or don’t wish to publicize pictures of their home.  These sellers would prefer to engage a seller’s agent who would go about finding a buyer more quietly.  Essentially, TAN is offering a platform for a select group of agents to conduct off-MLS sales for their clients.  In 2019, the NAR took decisive action to limit the ability of subscribing agents (and so, effectively, all licensed agents) to engage in private, off-MLS transactions. The organization adopted a rule called the “MLS Clear Cooperation Policy” (“hereinafter “Policy”) that essentially prohibits MLS subscribers from marketing listings anywhere else unless they also post the listing to their local MLS.  In practice, almost as soon as a home is listed for sale in any form, it must be listed on the MLS.  The rule requires that if you want benefit from the information available on the MLS, you can’t withhold information from the MLS.  Since TAN members are also MLS subscribers (that is how they got to be “elite” realtors), it means that every listing posted on TAN’s exclusive service must also be posted on the MLS.  Under the NAR rule, the sale cannot be “quiet,” consequently there is no reason to belong to TAN. Id at 6-7.  TAN alleged this rule was designed by the NAR to eliminate competition from TAN and other alternative listing services and constitutes a violation of the Sherman Act as a “group boycott.” TAN alleged that the Clear Cooperation Policy constitutes an agreement among NAR member agents not to compete with each other through off-MLS marketing, thereby cutting off TAN and other private listings services from the supply of agent memberships. Top Agent at 8.

The court dismissed the complaint for failure to allege “antitrust injury” noting that the canonical rule is that an antitrust injury must be an injury that flows from the anticompetitive aspect of the defendant’s activity. Atlantic Richfield Co. v. USA Petroleum Co., 495 U.S. 328, 334 (1990). The court stated that a company should only be able to invoke the antitrust laws to recoup its own losses when those losses result from harm done to competition in the market, “since it is inimical to the antitrust laws to award damages for losses stemming from continued competition.” (internal quotations omitted). Top Agent at 8.  If a company harms a competitor, the competitor must explain why the company’s actions ultimately result in higher prices, lower quality, or reduced choice, to the consumer. Id. The court stated, “One helpful rule is that an injury can never be an antitrust injury if it flows from an aspect of the defendant’s activity that actually benefits competition.” Pool Water Products v. Olin Corporation, 258 F.3d 1024, 1034 (9th Cir. 2001) (citing Rebel Oil Co. v. ARCO, 51 F.3d 1421, 1433 (9th Cir. 1995)).” Top Agent. at 9.

Antitrust injury is a threshold issue, meaning that if a plaintiff cannot allege an antitrust injury, the suit cannot proceed no matter how egregious the defendant’s alleged antitrust violation may be.  The court found that the complaint, taking the allegations as true, “lays out a reasonable argument that the [NAR] policy is so broad that its overall effect on the market for homes is anticompetitive.” Id. at 10-11.  But the court dismissed the suit because even assuming that the required MLS policy constitutes an antitrust violation, “TAN has failed to state antitrust injury because its alleged harm—the loss of agent members—does not flow from effects of the Policy that are harmful to competition. Moreover, taking the allegations in the complaint as true, TAN could never allege an antitrust injury from the Policy, because TAN’s business model is itself anticompetitive in a way that the Policy would tend to remedy. Id.at 11. 

The court noted that “to the extent the Policy prevents an exclusive network like TAN from operating the way it seeks to operate, it is not harmful to competition, even assuming the truth of the complaint’s well-pled allegations.” Id. at 12.  TAN is an exclusive listing service so that when a seller’s agent lists a home on TAN without listing it on the MLS, competition for that home is decreased. “TAN seems unwilling to recognize the reality of how its “elite” members earned their status as “top agents” in the first place.” Id.  TAN agents are free to drop their MLS subscription, and thus not be bound by those rules, but for homes listed by sellers’ agents who are TAN members, the Policy ensures that buyers represented by both TAN and non-TAN agents are able to view their listings. And better information is available to the market, as agents are equally able to compare price and quality across all listings and use that information to create listings and negotiate sales.” Id. at 13.  The court concluded that “when the allegations in the complaint show that the plaintiff’s desired business model is harmful to competition, injury resulting from the aspect of a competitor’s practice that interferes with that business model cannot be antitrust injury.” Id at 14.

Because TAN lacks antitrust injury, its three claims under California state laws also fail. A plaintiff bringing claims under the Cartwright Act must meet the same antitrust injury requirement as under the Sherman Act. Kolling v. Dow Jones & Co., 137 Cal. App. 3d 709, 723-24 (1982). 

The Ninth Circuit panel affirmed the district court’s summary judgment in favor of AMN Healthcare, Inc., in Aya Healthcare Services, Inc.’s antitrust action involving the non-solicitation provision within AMN’s contract with Aya to provide travel nursing services to hospitals and other healthcare facilities.  The non-solicitation agreement was ancillary to a procompetitive collaboration between the parties so the per se rule did not apply.  The plaintiff failed to produce required economic evidence under the rule of reason and the case was, therefore, properly dismissed. Aya Health Services v. AMN Health Care, Case No., 20-55679(9^th Cir. August 19, 2021)(hereinafter “Aya—9^th Circuit”).

Both parties are health care staffing agencies that place travel nurses on temporary assignments.  AMN was not always able to fulfill the demand for travel nurses and needed a backup for demand it could not meet.  AMN contracted with AYA and the contract included a provision prohibiting AYA from soliciting AMN’s employees. AYA alleged that the non-solicitation provision is an unreasonable restraint of trade prohibited by the Sherman Act.

The panel held that the per se rule did not apply because the non-solicitation provision was ancillary and reasonably necessary to the parties collaboration which was pro-competitive.   Judged under the rule of reason, AYA failed to raise an issue of material fact with respect to whether the non-solicitation agreement had a substantial anticompetitive effect that harmed consumers in the relevant market.

It was undisputed that the parties non-solicitation agreement was an agreement between horizontal competitors.   The panel agreed with the district court that the non-solicitation agreement was reasonably necessary to allow the collaboration between AMN and Aya to provide an adequate supply of travel nurses to hospitals (consumers).  The non-solicitation agreement was necessary to allow AMN to collaborate with Aya without risking losing its own personnel during the collaboration.  The panel agreed with the district court’s finding; “The non-solicitation agreement, therefore, promotes “competitiveness in the healthcare staffing industry”—more hospitals receive more traveling nurses because the non-solicitation agreement allows AMN to give spillover assignments to Aya without endangering its “establish[ed] network[] [of] recruiters, travel nurses, AVs, and of course, hospital customers.” Aya Healthcare, 2020 WL 2553181, at *14.”  Aya–9^th Circuit at 12-13.   The restraint therefore qualified as an ancillary restraint, which triggered rule of reason analysis.

The panel found that the restraint was ancillary even though it was of unlimited duration because the ancillary restrain doctrine does not require that the restraint meet a “least restrictive alternative” test.  Id. at 15.

The complaint failed under rule of reason analysis because Aya failed to satisfy its initial burden: it did not demonstrate that a triable issue of fact exists with respect to harm to competition.  Quoting from Am. Express v. Ohio 138 S.Ct. 2274, 2284 (2018), the panel stated there are two ways a plaintiff may prove that the relevant restraint has a substantial anticompetitive effect that harms consumers: “First, the plaintiff may provide the court with “[d]irect evidence of anticompetitive effects,” which would include “proof of actual detrimental effects [on competition], such as reduced output, increased prices, or decreased quality in the relevant market. Second, the plaintiff may provide “[i]ndirect evidence,” which “would be proof of market power plus some evidence that the challenged restraint harms competition.” Aya–9^th Circuit at 16.

Aya’s direct evidence of harm to competition was a claim of supracompetitive pricing in certain regional markets. The district court found that Aya’s economic expert’s pricing study was flawed and failed to demonstrate any anticompetitive effects.  Aya, thus provided no evidence “from which a reasonable juror could conclude that prices in certain markets are supracompetitive or that rival agencies are otherwise prevented from undercutting AMN on price.” Id. at 17.  And with respect to indirect evidence, Aya failed to make the requisite showing of market power plus harm to competition. Id at 17-18.  In summary, the panel agreed with “the district court’s conclusion that Aya did not carry its initial burden to prove that AMN’s non-solicitation agreement has a substantial anticompetitive effect that harms consumers in the relevant market. Aya therefore cannot demonstrate that the restraint violates the rule-of-reason standard.”   Id. at 19.

The case shows that if the plaintiff cannot meet the per se standard, or put another way, if the defendants can persuade the court that the restraint was ancillary to a por-competitive agreement, the obstacles in proving a case under the rule of reason are difficult, and expensive to surmount.