E-briefs, News and Notes: June 2024

By Amar S. Naik & Dan Grushkevich

Last month, the U.S. District Court for the District of Minnesota denied separate motions to stay, transfer, and dismiss in United States et al. v. Agri Stats, Inc., No. 23-cv-3009-JRT (D. Minn). The government plaintiffs allege that defendant Agri Stats’s consulting services and reports on sales, live production, processing, and profits in the broiler chicken, pork, and turkey industries constitute an information-exchange conspiracy, enabling processors to raise prices despite not communicating directly with one another. Agri Stats moved to stay discovery pending resolution of its motion to transfer the case and motion to dismiss. The court denied all three motions.

Denial of the Motion to Stay Discovery

Agri Stats argued that pursuant to Rule 26(c) or the court’s inherent authority, the district court should stay discovery because defendant’s motion to transfer and motion to dismiss raised “fundamental questions” regarding the power of the court to adjudicate plaintiffs’ claims. See United States et al. v. Agri Stats, Inc., No. 23-cv-3009-JRT, Dkt. No. 117, at 3 (D. Minn May 17, 2024). It also argued that proceeding with discovery would unfairly burden Agri Stats even though plaintiffs already possessed over 30 million documents and 600 deposition transcripts. Id.

The court determined that Agri Stats failed to satisfy its burden to show “good cause” for a stay because it did not show that its motion to dismiss any claims relating to broiler chicken reports had more than “a ‘mere possibility’ of success.” Id. at 7. The court added that it need not assess the viability of any other claims because it would be inappropriate to stay some claims but not others. Id. The court further held that any additional discovery would not be unduly burdensome because most of it would involve third parties and “many disclosures are already complete.” Id. at 13. The court instead concluded that any delay would harm plaintiffs and the public interest because of the alleged “ongoing harm to consumers.” Id. at 15.

Denial of the Motion to Transfer

Agri Stats argued that pursuant to 28 U.S.C. § 1404, the court should transfer venue to the Northern District of Illinois—where the Broilers and Turkey litigation are pending—or to the Northern District of Indiana—where Agri Stat’s primary place of business is located. See United States et al. v. Agri Stats, Inc., No. 23-cv-3009-JRT, Dkt. No. 118, at 6 (D. Minn May 28, 2024). Agri Stats argued that venue in Minnesota was improper because a substantial part of the events or omissions giving rise to the claim did not occur in Minnesota. Id. It further argued that the convenience of the parties and witnesses and the interests of justice warranted the transfer.

The court rejected these arguments. The court first held that while 28 U.S.C. § 1391 provides the general venue standards, Section 12 of the Clayton Act permits a less restrictive venue analysis for antitrust claims as “[a]ny suit, action, or proceeding under the antitrust laws against a corporation may be brought not only in the judicial district whereof it is an inhabitant, but also in any district wherein it may be found or transacts business.” Id. at 7 (quoting 15 U.S.C. § 22). The court therefore concluded that venue is proper because Agri Stats “sufficiently conducts business in Minnesota” by distributing its reports to processors within the state. Id. at 7-8.

The court next explained that Agri Stats’s other arguments could not overcome the “considerable deference” given to plaintiffs’ choice of forum, particularly when government enforcers bring a federal antitrust action and when one of the plaintiffs resides in the forum. Id. at 8. The court found that Agri Stats failed to show that the inconvenience to any parties or witnesses “substantially outweighs the inconvenience” that plaintiffs would suffer from any transfer because there was sufficient overlap between the discovery in this case and the Pork litigation already pending in the same district. Id. at 12. It likewise concluded that any judicial economy gained by transferring the case to the same district as the Broilers and Turkey cases did not outweigh the deference given to the government’s venue choice in antitrust lawsuits. Id. at 13.

Denial of the Motion to Dismiss

Agri Stats moved to dismiss the complaint for a lack of subject matter jurisdiction pursuant to Rule 12(b)(1) and failure to state a claim pursuant to Rule 12(b)(6). With respect to plaintiffs’ pork and turkey claims, Agri Stats argued that there was no Article III case or controversy because Agri Stats stopped selling reports for those products. Agri Stats, No. 23-cv-3009-JRT, Dkt. No. 118, at 15. And because there were no such current sales of those reports, Agri Stats asserted that plaintiffs failed to allege facts warranting prospective relief (i.e., injunctive relief). Id. at 18. Agri Stats also asserted that the government plaintiffs failed to allege a cognizable antitrust injury because they did not allege “a concrete, actionable threat of antitrust injury to themselves.” Id. at 20. Separately, Agri Stats argued that stare decisis barred plaintiffs’ chicken claims based on a summary judgment decision in the Broilers case. Id. at 22.

The court first rejected Agri Stats’s arguments with respect to plaintiffs’ pork and turkey claims. The court held that to satisfy Article III standing requirements when seeking injunctive relief, plaintiffs must show an “injury-in-fact” that is “a threat of ongoing or future harm” and is “both real and immediate, not conjectural or hypothetical.” Id. at 16 (internal citations omitted). The court acknowledged that Agri Stats was no longer producing pork and turkey reports. Id. at 17. But it found that plaintiffs alleged sufficient facts showing that Agri Stats intended to restart selling pork and turkey reports, that customers intend to resubscribe to those reports, and that Agri Stats was still advertising those reports online. Id. at 17-18. Based on this demonstration of defendant’s intent, the court also concluded that plaintiffs alleged sufficient facts warranting prospective relief. Id. at 19. Finally, the court held that plaintiffs satisfied any antitrust injury requirements because they sufficiently alleged that defendant’s conduct harmed the competitive process. Even though the governmental plaintiffs did not themselves suffer any harm, the Court held that harms to the states’ general economies were sufficient to confer antitrust standing for the states to pursue their claims in a parens patriae capacity. Id. at 20-21.

The court also rejected Agri Stat’s stare decisis argument regarding plaintiffs’ chicken claims. While the court agreed that uniformity in law should be encouraged, it found that a summary judgment decision from the Broilers case could not serve as a basis to dismiss plaintiffs’ claims at this early stage of the litigation. Id. at 22. The court explained that plaintiffs’ claims were not barred by res judicata or collateral estoppel because plaintiffs were not parties in Broilers, which means that the court only needs to give the other decision the same consideration as it would any other district court ruling. Id. at 23. The court then concluded that because a summary judgment decision is based on the evidence presented before a judge, it would be premature to rely on such a decision to dismiss plaintiffs’ claims that may rely on other evidence and arguments. Id. Thus, the court denied Agri Stats’ stare decisis argument. Id.

By Wesley Sweger (Kesselman Brantly Stockinger LLP)

On June 4, 2024, in an opinion by Judge Koh, the Ninth Circuit reversed final judgment found in favor of Sutter Health and remanded to the Northern District of California for a new trial.

Background

In 2012, Plaintiffs filed a class action against Sutter Health—a healthcare system that spans 24 hospitals, 5 medical foundations, and 40 ambulatory surgery centers—alleging Sutter abused its market power in Northern California to charge supracompetitive rates to health plans, which were then passed on to Plaintiffs in the form of higher premiums. Specifically, Plaintiffs allege Sutter engaged in: (1) unlawful tying and an unreasonable course of conduct, both in violation of Sherman Act Section 1 and the Cartwright Act; (2) monopolization and attempted monopolization in violation of Sherman Section 2; and (3) unlawful business acts or practices in violation of the Unfair Competition Law (“UCL”). Plaintiffs represent a certified class of individuals and businesses in Northern California who are or were insured by health plans that contract with Sutter Health. “Plaintiffs are therefore ‘indirect purchasers’ of Sutter’s services, and their ‘theory of antitrust impact depends on two separate overcharges’: an overcharge by Sutter to the health plans, and an overcharge by the health plans to Plaintiffs.” Sidibe, 103 F.4th at680.

The district court granted summary judgment to Sutter on the monopolization claims. Because the parties sought damages under only the Cartwright Act, the case proceeded to trial on the Cartwright claims alone and equitable remedies under the Cartwright Act, Sherman Act, and the UCL were to be decided afterwards. The jury found in favor of Sutter.

Plaintiffs appealed contending the district court erred in failing to instruct the jury of Sutter’s anticompetitive “purpose” and excluding evidence of Sutter’s conduct before 2006.

Jury Instructions

Plaintiffs contended that the district court contravened California law when it omitted the word “purpose” from the jury instructions on Plaintiffs’ unreasonable course of conduct claim under the Cartwright Act and that this legal error was not harmless. The court agreed.

The appeal “concern[ed] CACI 3405 [describing the rule of reason], which states that a plaintiff may prove the second element of an unreasonable course of conduct claim by proving either anticompetitive purpose or effect, and CACI 3411, which lists factors for a jury to consider in weighing the anticompetitive purposes or effects of a defendant’s conduct.” Id. at 682. The court noted:

Although the second element [in CACI 3405] may be proven by virtue of anticompetitive purpose or effect, the third element still requires a plaintiff to prove that anticompetitive effects outweigh any procompetitive effects. As a result, under CACI 3405, proof of anticompetitive purpose does not eliminate the need to provide proof of anticompetitive effect.

Id. at 683 (emphasis added).

The court found the jury instructions “reflect the widespread consensus that consideration of anticompetitive purpose is an essential aspect of the rule of reason analysis under both the Cartwright Act and the Sherman Act.” Id. at 686. Although the court noted that anticompetitive purpose alone is not enough to prove a claim of an unreasonable course of conduct, the jury “must have the option of considering [anticompetitive purpose], which is only possible if properly instructed that the factor exists.” Id. “The ultimate goal [of the rule of reason] is to determine the ‘restraint’s actual effect on competition.’ As a means of determining anticompetitive effect, however, anticompetitive purpose is one of several relevant factors that a trier of fact may consider.” Id. (quoting Ohio v. AMEX, 585 U.S. 529 (2018)).

The court found omission of the word “purpose” from the jury instructions was not a harmless error. Since legal error was established, prejudice is presumed, and Sutter had the burden to demonstrate that it is more probable than not that the jury would have reached the same verdict. Sutter argued that because the jury answered “no” to the question “Did Sutter force the health plans to agree to contracts which had terms that prevented the health plans from steering Plaintiffs to lower-cost, non-Sutter hospitals within the plan network?,” the error in the jury instructions was harmless. Id. at 687. The court rejected this argument, reasoning “consideration of a party’s motives often shapes interpretations of that party’s actions” and “may help” the factfinder “to predict consequences.” Id. at 688 (quoting Justice Brandeis in Bd. of Trade of Chi., 246 U.S. 231, 238 (1918)). The court found “Sutter’s motives for adopting the challenged contract terms are therefore relevant to whether Sutter ‘forced’ health plans to agree to [the challenged] terms.” Id.

Excluded Evidence

Plaintiffs’ second contention is that the district court abused its discretion in excluding pre-2006 evidence under Fed. R. Evid. 403 (as needlessly cumulative and minimally relevant) and that the error was prejudicial. Again, the court agreed.

Rule 403 allows the court to “exclude relevant evidence only if its probative value is substantially outweighed by one or more of the articulated dangers or considerations.” Id. at 691. That is, Rule 403 “sets a high bar for exclusion” and should be used “sparing[ly].” Id.

The court first described Plaintiffs’ theory of the case as it was necessary to understand the probative value of the excluded evidence. Plaintiffs’ primary allegation is that Sutter sought to use its market power (in regions where its providers experienced little to no competition) to charge higher prices in regions where its providers competed with non-Sutter providers, lacked market power, and were forced to charge lower prices. “To do so, around the turn of the millennium Sutter began contracting with health plans on a ‘systemwide’ basis, meaning that one contract governs the relationship and imposes common terms between a health plan and all Sutter providers.” Id. at 689. Plaintiffs allege these systemwide contracts constitute unlawful tying and an unreasonable course of conduct. Plaintiffs further allege that “Sutter conceived of these contract terms as a means to charge higher prices and that Sutter began including these terms in its systemwide contracts between 2001 and 2005”—i.e., “prior to 2006, the cutoff date that the district court imposed for the introduction of evidence.” Id. at 690.

The district court excluded evidence predating 2006 for “‘minimal relevance’ because Sutter’s systemwide contracts were renegotiated regularly and the specific contracts that Plaintiffs alleged had caused them harm during the damages period were negotiated and took effect shortly before 2011.” Id. at 692. The Ninth Circuit disagreed, stating the district court “conflated Plaintiffs’ theory of liability with any damages to which Plaintiffs would be entitled if they prevailed at trial.” Id. at 692.

First, speaking to the unreasonable course of conduct claim, the court found the pre-2006 evidence to be “highly relevant” because “‘the history of the restraint and the reasons for its adoption’ are crucial factors under the rule of reason.” Id. at 692 (quoting Bd. of Trade of Chi., 246 U.S. at 238). Second, the court noted that although tying arrangements are per se illegal, evidence of Sutter’s purpose (demonstrated in pre-2006 evidence) was still relevant. The court distinguished “intent as a stated justification for otherwise anticompetitive conduct with intent as a form of evidence that a party engaged in anticompetitive conduct in the first place. Evidence of the former is indeed irrelevant to per se violations.” Id. at 693. “[H]owever, evidence of a defendant’s intent can often be important to prove that a defendant ‘intentionally engaged in conduct’ constituting a per se violation.” Id.

Overall, and for various reasons, the court found the pre-2006 evidence highly probative, unprejudicial, and not cumulative, concluding “this is one of those rare cases” where reversal of the district court’s Rule 403 discretion was warranted. Id. at 704. Finally, the court noted Sutter failed to prove it is more probable than not that the jury would have reached the same verdict with the excluded evidence. “Much of the excluded evidence was probative of whether Sutter’s purpose in . . . adopting the challenged contract terms was to engage in anticompetitive behavior.” Id. at 705. And, as discussed above, the district court erroneously omitted “purpose” from the jury instructions.

By Lillian Grinnell

In the Federal Trade Commission (FTC)’s lawsuit against Amazon and three of its executives, currently pending in the District of Washington, Judge John Chun denied the defendants’ motion to dismiss, allowing the case to go forward. The case centered on Amazon Prime subscriptions, with the FTC alleging that the defendants violated Section 5(a) of the FTC Act and Section 4 of the Restore Online Shoppers’ Confidence Act (ROSCA) by: (1) tricking consumers into subscribing to Prime without disclosing material terms of the subscription clearly enough to gain informed consent; and then (2) not providing simple enough mechanisms for those consumers to cancel their subscriptions.

Amazon, in its motion to dismiss, refuted the FTC’s contentions, arguing that its disclosures were sufficiently clear and conspicuous in compliance with California’s Automatic Renewal Law (“ARL”) cases, that consumers demonstrated informed consent by clicking a button to signify their agreement to Prime terms and conditions, and that a reasonable user could navigate the cancellation process.

Though the FTC’s operative complaint dealt with several of Amazon’s Prime-related upsells, the Court here only dealt with the primary one, the Universal Prime Decision Page (UPDP). The UPDP, as pled in the complaint, is unavoidable for consumers and will interrupt consumer shopping experiences by presenting them with a prominent button to enroll in Prime and a less conspicuous link to decline. Clicking the first button instantly enrolled the customer in Prime, though beneath it was small print disclosing that through signing up the customer agreed to Prime terms and authorized payment until cancellation.  Cancellation, meanwhile, required a customer to navigate the “Iliad Flow”, or a four page, six click, fifteen option process begun by locating the difficult to find “End Membership” link. Otherwise, a customer could call customer service.

The FTC alleged that Amazon was well aware of accidental signups, as the company’s internal documents were filled with references to them. A major issue within the company, moreover, was an effort to “clarify” the sign-up process, which proved unpopular as it would decrease the number of subscriptions. Such changes were implemented in 2020, but when it indeed caused the loss of subscribers, they were rolled back.

In determining how clear and conspicuous the link to decline was, Judge Chun, noting that ROSCA did not provide a definition of that term, turned to state law contract formation cases like California’s aforementioned ARL. In particular, the Court examined Oberstein v. Live Nation Ent., Inc., 60 F.4th 505, 516 (9th Cir. 2023), which held that “To determine whether notice is sufficient under the [California] ARL . . . ‘the full context of the transaction is critical,’ because transactions in which ‘a consumer [is] signing up for an ongoing account,’ makes it ‘reasonable to expect that the typical consumer in that type of transaction contemplates entering into a continuing, forward-looking relationship’” (quoting Sellers v. JustAnswer LLC, 73 Cal. App. 5th 444, 471, 477, (Cal Ct. App. 2021). Oberstein also “noted that when a consumer is attempting to start a free trial, especially when it is offered as a gift, it is much “less likely that [the consumer] would ‘scrutin[ize] the page for small text outside the payment box or at the bottom of the screen linking them to 26 pages of contractual terms.’” Slip op. at 19, quoting id., 60 F.4th at 516. And the Ninth Circuit in Keebaugh v. Warner Bros. Ent. Inc., __ F.4th __, No. 22-55982, 2024 WL 1819651, at *9 (9th Cir. Apr. 26, 2024), which involved auto-renewal, stressed the import of courts considering both a transaction’s context in which it was formed and “the visual aspects of the notice.” Examining the screenshots of the Amazon Prime sign-up and cancellation flows included in the operative complaint, the Court here concluded that “when it is possible that a reasonable consumer would not find disclosures of the material terms clear and conspicuous, the Court cannot determine as a matter of law that Plaintiff failed to state a claim on this basis.” Slip op. at 21. In particular, the court found the fact the Prime upsell would appear in the checkout process persuasive as it made it more unlikely that consumers would look for the terms of enrollment. “The Court must view these disclosures through the lens of a reasonable consumer “merely attempting to start a free trial” or accepting a “gift” offer, rather than a consumer who “contemplate[s] some sort of continuing relationship” because some of the UPDP pages include language such as “we’re giving you a 30-day FREE Trial of Prime.” Id. at 24.

Amazon’s cited cases, in contrast, were distinguishable because in each customers were required to manually enter payment information – in contrast to the single-click UPDP. And because the sign-up process consisted of one button, a reasonable consumer might not realize that they were expressly agreeing to Prime terms or that they were consenting to an auto-renew subscription. Furthermore, one might believe, due to the contrast between the large orange sign-up button and the less-noticeable decline link, that there would be no way to get to checkout without signing up. Moreover, Amazon could not in the Court’s view provide an apposite case with similar cancellation processes that were upheld, and the Court therefore held that it could not hold that a reasonable consumer would find it simple to cancel.

The defendants argued that the FTC had unfairly changed it interpretation of its own regulations and had not enforced these laws in the same way before, depriving Amazon of fair notice. This, too, was rejected, as “an agency does not waive its right to enforce a statute when it has declined to do so in the past” and it was the Court’s job to “merely evaluate[] whether the allegations state a claim under the language of ROSCA and the FTC Act.” Slip op. at 44. Furthermore, Amazon certainly had notice as pled in the complaint that customers were complaining that they were being misled by Prime sign-up and cancellation flows – and therefore should have had notice that it was potentially running afoul of the FTC Act and ROSCA.

This case ought to be a warning for other online companies whose cancellation and sign-up flows may be similarly deceptive or complicated. Many consumers have renewing subscriptions that they do not cancel because they are unaware of their existence; more clear signup language and easier cancellation methods may ameliorate this issue to an extent.

By David Lerch and Nathan Kahn

On May 13, 2024, the United States Court of Appeals for the Second Circuit affirmed the district court’s dismissal of the plaintiffs’ claims in In re Bystolic Antitrust Litigation, No. 23-410 (2d Cir. May 13, 2024), concluding that the plaintiffs did not plausibly allege that Forest Laboratories’ payments to the generic manufacturers to keep their product off the market were unjustified or unexplained, as required by the Supreme Court in Federal Trade Commission v. Actavis, Inc., 570 U.S. 136, 141, 153–58 (2013). The agreements were legitimate business transactions and there was no evidence of anticompetitive intent. The Second Circuit noted that this opinion is the first in which it has considered an Actavis claim. 

Background

Forest Laboratories (“Forest”), the brand manufacturer of the high-blood -pressure drug Bystolic, engaged in patent infringement litigation with seven generic drug manufacturers. This litigation arose from the regulatory framework established by the Hatch-Waxman Act (“Act”), which aims to balance the interests of brand name drug manufacturers and generic drug manufacturers.

The Act allows generic manufacturers to file abbreviated new drug applications (“ANDAs”) with a Paragraph IV certification, asserting that the brand name drug’s patent is invalid or will not be infringed by the generic drug. Filing a Paragraph IV certification constitutes a nominal act of patent infringement, enabling the brand manufacturer to sue the generic manufacturer. If the parties settle, the generic manufacturer might agree to delay the launch of its product, potentially in exchange for a payment from the brand manufacturer. In Federal Trade Commission v. Actavis, Inc., the Supreme Court held that reverse payments can “sometimes” violate the antitrust laws if they are large and “unjustified” — but that they do not do so when they represent fair value for goods or services exchanged as part of a bona fide commercial relationship. 570 U.S. 136, 141, 153–58 (2013).

This type of payment, known as a reverse payment, can sometimes be anticompetitive if it is large and unjustified, as it may be used to share monopoly profits and delay competition from generic manufacturers.

Forest settled its patent infringement lawsuits against the seven generic manufacturers. However, contemporaneously with these settlements, Forest entered separate commercial transactions with each of the generic manufacturers for various goods and services. The terms of these commercial transactions stipulated that the generic manufacturers must wait until three months before the Bystolic patent’s expiration to introduce their generic versions of the drug to the market.

The plaintiffs, purchasers of Bystolic and its generic equivalents, alleged that these contemporaneous transactions involved unlawful reverse payments disguised as pretextual compensation for various goods and services. They claimed these transactions were intended to delay the market entry of generic Bystolic, thus violating federal and state antitrust laws.

The United States District Court for the Southern District of New York twice dismissed the case–initially without prejudice and then with prejudice–for failure to state a claim, citing the plaintiffs’ inability to plausibly allege that the reverse payments were unjustified under the standards set forth in FTC v. Actavis, Inc. The plaintiffs appealed, and the United States Court of Appeals for the Second Circuit reviewed the case.

Analysis

The central issue is whether Forest’s contemporaneous payments to the generic manufacturers were unjustified reverse payments intended to delay the market entry of generic Bystolic (slip op. at 32-33) According to the Supreme Court’s decision in Actavis, reverse payments can sometimesviolate antitrust laws if they are both “large” and “unjustified.” 570 U.S. at 158. The Court held that such payments must be evaluated under the familiar rule of reason test, a test that balances anticompetitive effects against procompetitive justifications. Id. at 159. Importantly, the Actavis decision clarified that reverse payments are not per se illegal but can be subject to antitrust scrutiny due to their potential for genuine adverse effects on competition. Id.

A reverse payment is unlawful if it is made to induce the generic manufacturer to stay out of the market, thereby maintaining monopoly profits to be shared between the brand and generic manufacturer. Id. at 154. The Court emphasized that these payments are evaluated against a backdrop of strong public policy favoring the settlement of disputes, including patent litigation. Id. at 153. Settlements encourage judicial economy and the continuation of innovation incentives provided by patents.  “It instructed that whether a reverse payment passes antitrust muster ‘depends upon its size, its scale in relation to the payor’s anticipated future litigation costs, its independence from other services for which it might represent payment, and the lack of any other convincing justification,” including fair value for goods and services exchanged as part of a bona fide commercial relationship.”  See id. at 156, 159.

A reverse payment can violate antitrust laws only if it is both “large” and “unjustified.” Id. at 158.  For a payment to be deemed unjustified, it must lack legitimate business justifications and not reflect fair value for goods or services provided. Id. The relevant antitrust question is whether the payment was made to maintain and share monopoly profits absent any other convincing justification. Id. at 154.

The Supreme Court instructed that whether a reverse payment passes antitrust muster “depends upon its size, its scale in relation to the payor’s anticipated future litigation costs, its independence from other services for which it might represent payment, and the lack of any other convincing justification,” including fair value for goods and services exchanged as part of a bona fide commercial relationship. Id. at 156, 159 (slip op. at 12).

The Second Circuit further noted that “[m]ost important for this case, whether a reverse payment is “unjustified” turns on whether it “reflects traditional settlement considerations,” including “fair value” for products or services provided by the generic manufacturer pursuant to a legitimate commercial relationship entered into at arms’ length with the brand manufacturer. See id. at 156 (slip op. at 31-32). A plaintiff must plausibly allege that the payment is a pretext for nefarious anticompetitive motives rather than made pursuant to traditional settlement considerations. Id. at 159; see also id. at 158 (“Although the parties may have reasons to prefer settlements that include reverse payments, the relevant antitrust question is: What are those reasons? If the basic reason is a desire to maintain and to share patent-generated monopoly profits, then, in the absence of some other justification, the antitrust laws are likely to forbid the arrangement.”) (slip op. at 32).

According to Plaintiffs, Forest used the six commercial transactions to pretextually pay the generic defendants for products or services it did not truly need. These overpayments, Plaintiffs claim, shielded brand Bystolic from competing with its generic equivalents and enabled Forest to share monopoly profits with the generic defendants (slip op. at 32-33).

The Court concluded that there is no allegation plausibly showing that any of the six commercial transactions reflected anything other than “fair value” for goods and services obtained as a result of good faith business dealings–one of the “traditional settlement considerations” squarely privileged under Actavis.  570 U.S. at 156 (slip op. at 34).

Evaluation of Forest’s Payments

The Second Circuit’s analysis in this case focused on whether the payments made by Forest to the generic manufacturers were unjustified as set forth in Actavis.

The Court noted that the following reasons for dismissal are overarching: (1) the terms of the commercial transactions reflect bona fide business considerations; (2) the size of payments is not sufficiently contextualized or compared to enable us to infer that the payments are plausibly unjustified; (3) Forest’s need for alternative supplies of active pharmaceutical ingredients (“API”) or finished pharmaceutical products was consistent with what Forest previously disclosed to investors; (4) a lack of public disclosures about business plans or investments does not necessarily bear upon whether those ventures are truly legitimate or genuine; (5) it is sensible for counterparties to enter into condensed term sheets with the expectation of subsequently negotiating definitive agreements that are more detailed; (6) payments for developmental or commercial milestones, or research and development expenses, bespeak rational commercial incentives; (5) provisions in the commercial transactions that are designed to ensure price competition do not fit with Forest’s alleged intention to funnel secret payments to the generic defendants; (6) agreements between Forest and other counterparties need not be identical to Forest’s agreements with the generic defendants, or even closely resemble them; and (7) the agreements’ provisions trump allegations of unsupported speculation about nefarious motives. (slip op. at 37).

Hetero Transaction

The first agreement involved Hetero, where Forest agreed to purchase nebivolol API–the active ingredient in Bystolic–from Hetero, committing at least $37.5 million over five years (slip op. at 38). Plaintiffs argued that Forest did not need an alternative supplier since it already had sufficient supply (slip op. at 38). However, the court found that securing an alternative supplier was consistent with Forest’s disclosed need for supply chain security (slip op. at 38). The terms, including a meet-or-release provision to ensure competitive pricing, reflected bona fide business considerations (slip op. at 38). For example, the Forest-Hetero term sheet included a “meet-or-release” provision providing that if Hetero did not match a third-party offer to supply nebivolol API at a 15%-lower price, Forest’s minimum purchase amount would drop from 50% to 20% per year (slip op. at 38). There was a similar meet-or-release provision in the Janssen agreement (slip op. at 39).  The court noted that having multiple suppliers is a common business strategy to mitigate risks associated with supply chain disruptions (slip op. at 38). The court further emphasized that the meet-or-release provision allowed Forest to benefit from any lower prices offered by other suppliers, thus promoting competition rather than hindering it (slip op. at 39-40). Forest’s decision to secure another supplier was also consistent with its 10-K filings, which highlighted the importance of having multiple sources for critical supplies to avoid potential shortages and ensure a steady supply of the active ingredient (slip op. at 38)

Torrent Transaction

In the second agreement, Forest purchased ten patents from Torrent for $5 million upfront and up to $12 million in milestone payments (slip op. at 41-42). Plaintiffs claimed the milestone payments were easy to achieve and that the patents themselves had little value to Forest (slip op. at 42). Of the milestone payments, $7 million was owed to Torrent following the issuance of one of the ten assigned patents in the U.S.; only one such payment was owed irrespective of how many of the ten patents issued there. Forest agreed to assist Torrent in prosecuting the patents, to increase the chances of issuance. The remaining $5 million in milestone payments was triggered upon the earliest of five events: (1) Forest submitting a NDA for a new nebivolol drug covered by one of the assigned patents; (2) Forest selling such a drug in the U.S.; (3) Forest suing a third party for infringement of an assigned patent in the U.S.; (4) Forest licensing an assigned patent to a third party; and (5) Forest and Torrent having a reasonable basis to believe that a third party is infringing an assigned patent (slip op. 41-42).  The court determined that the milestone payments were based on significant development achievements and that the patents’ issuance in the U.S. added value to Forest’s portfolio, supporting legitimate business interests (slip op. at 42-43). The agreement aimed to help Forest develop and market new nebivolol products, which was a rational business strategy (slip op. at 43). The court also noted that the $7 million milestone payment was only triggered upon the issuance of a patent in the U.S., indicating that the payment was linked to the successful development and commercialization of the new products (slip op. at 43). Additionally, the $5 million milestone payment was contingent on Forest achieving key developmental milestones, such as submitting a New Drug Application (NDA) or initiating a lawsuit for patent infringement, further demonstrating the agreement’s alignment with Forest’s business objectives (slip op. at 43).

Alkem Transaction

The third agreement involved a term sheet between Forest and both Alkem and Indchemie (together, “Alkem”), which entailed paying up to $20 million for the supply of finished (nebivolol) and Byvalson (nebivolol and valsartan) (slip op. at 44-45). Plaintiffs contended that Forest did not need additional supply and that the milestone payments were duplicative (slip op. at 45-46). The court found that the agreement’s terms, including development work payments and price caps, were consistent with Forest’s business needs and did not indicate a pretext for anticompetitive payments (slip op. at 46-47). The court highlighted that the term sheet included provisions to ensure price competition and the ability to seek alternative suppliers (slip op. at 47). As with the Hetero transaction, Forest’s 10-K filings also supported the need for additional suppliers, as they disclosed potential risks associated with relying on a single manufacturing source for finished products (slip op. at 46). The development work payments were tied to specific milestones, such as the completion of clinical trials or regulatory approvals, ensuring that the payments were made in exchange for tangible, important progress in product development (slip op. at 46-47). Moreover, the price cap provision protected Forest from potential price increases by limiting Alkem’s ability to charge more than 10% above market rates, promoting competitive pricing and preventing the agreement from being used as a means to transfer excessive payments (slip op. at 47).

Glenmark Transaction

In the fourth agreement, Forest entered into a $15 million collaboration and option agreement with Glenmark to develop mPGES-1 inhibitors (slip op. at 48). Plaintiffs argued that Forest’s interest in Glenmark’s development was not publicly disclosed, and that the agreement was structured differently from a previous collaboration agreement between Forest and Glenmark (slip op. at 50). The court held that the agreement reflected a genuine business relationship, with payments structured around R&D milestones and a potentially lucrative exclusive negotiation option for Forest (slip op. at 52-53). The agreement allowed Forest to leverage Glenmark’s expertise in developing mPGES-1 products, aligning with Forest’s business objectives. The court noted that the collaboration and option agreement provided Forest with significant oversight and control over the development process through a Joint Development Committee (JDC) (slip op. at 49). The JDC’s responsibilities included monitoring the progress of the development work, providing recommendations, and reviewing clinical research data (slip op. at 47). This structure ensured that Forest’s payments were linked to the successful development of the mPGES-1 inhibitors and were not merely a pretext for delaying competition.

Amerigen Transaction

In the fifth agreement, Forest and Amerigen executed a term sheet for a collaboration agreement, under which Forest would pay Amerigen for the development of eight products (slip op. at 53).  Forest would make a $5 million payment upfront, as well as milestone payments of up to $20 million contingent on developments such as the completion of clinical bioequivalence studies, the FDA’s acceptance for filing of an ANDA for a U.S. Product, and the first commercial sale of such products (slip. op. at 53). Amerigen agreed to pay Forest specified percentages of gross margin (ordinarily 20%) as royalties for sales of the U.S. Products. If Amerigen failed to commercialize at least one U.S. Product within five years, Forest could terminate the term sheet as to all U.S. Products and recover all milestone payments, otherwise, Forest’s right of termination was limited to products for which specified developmental objectives had not been met, and so Forest was expressly authorized to recoup its (allegedly unlawful) reverse payment to Amerigen (slip op. at 53-54).

Plaintiffs argued that Forest “did not truly care” whether the U.S. Products fit into its portfolio, given that the term sheet allowed Amerigen to discontinue the development of these products if it met certain requirements (slip op. at 54). The Court noted that Amerigen’s discontinuation right was subject to several qualifications granting Forest considerable control over both the discontinuation process and the substitute products: (1) Amerigen could seek to discontinue only products that it believed were “no longer technically or commercially viable”; (2) Amerigen needed to provide Forest with a “Discontinuation Notice,” with a written explanation; (3) at Forest’s request, the parties were required to “promptly” meet to discuss the proposed discontinuation, and Amerigen was required to give reasonable consideration to Forest’s comments; (4) only after this meeting, and not until thirty days after Forest received the Discontinuation Notice, could Amerigen discontinue the product in question; (5) even then, discontinuation was contingent on Amerigen providing Forest with a written “Substitution Notice” proposing at minimum two alternative products “of similar value” for the discontinued product, “taking into account probability of technical success, time to commercial launch and commercial potential”; and (6) within thirty days of receiving the Substitution Notice, Forest would choose one of the substitution products to replace the discontinued product (slip op. at 55-56).

Plaintiffs also observe that, even though the term sheet contemplated the parties negotiating a definitive collaboration agreement “[i]mmediately” after the term sheet’s execution, the parties’ agreement is dated nearly a year after the term sheet’s effective date and only weeks after Forest received a civil investigative demand from the FTC concerning its settlements with the Generic Defendants (slip op. at 56).  According to Plaintiffs, this timing suggests that the collaboration agreement was executed chiefly as protection against antitrust liability but Forest entered into the term sheet well before it received the CID and the term sheet expressly anticipated subsequent negotiation of a definitive collaboration agreement, and the Complaint offers no reason to infer that it was unusual or improper for these negotiations to last close to one year (slip op. at 56-57).

Watson Transactions

Finally, Plaintiffs argued Forest made an unlawful reverse payment to Watson via two separate transactions:

• Forest entered into a letter agreement with Moksha8, a pharmaceutical company that commercializes products in Brazil and Mexico. The agreement acknowledged that Moksha8 had materially breached three loan and security agreements with Forest, relieving Forest of the need to extend additional loans to Moksha8. Forest nevertheless undertook to provide Moksha8 with roughly $7 million in credit. In exchange, Forest obtained a broad release from claims arising out of the loan and-security agreements. This letter agreement, therefore, provided for Forest to transfer value to Moksha8, not Watson, the alleged recipient of the illegal reverse payment, in exchange for a broad release.
•  Moksha8 entered into a termination and release agreement with Watson’s successor, Actavis (hereinafter “Watson”). Watson and Moksha8 agreed to release each other from any obligations or liabilities arising from: (a) prior agreements entered into by Watson and Moksha8 and (b) a prior merger agreement among Forest, Moksha8 and another entity and terminate the former set of agreements. Finally, Watson, not Forest, agreed to pay Moksha8 $4 million.

(slip. op. at 57-58).  

Plaintiffs claim that Forest’s letter agreement with Moksha8, in conjunction with the termination and release agreement between Moksha8 and Watson, effected a roundabout payment to Watson of $15 million or more in order to delay its launch of generic Bystolic. In particular, Plaintiffs contend that the releases Moksha8 granted to Watson pursuant to their termination and release agreement were worth at least $15 million more than the $4 million Watson agreed to pay Moksha8 and thus at least $19 million in total. Plaintiffs alleged that Forest somehow paid Moksha8 to make up the difference, although Plaintiffs admit that they “cannot tell precisely how Forest used the transaction with Moksha8 to transfer this payment to Watson” (slip op. at 59).  The Court concluded that the means of payment was a mystery and Plaintiffs made no attempt to explain how Forest’s $7 million loan to Moksha8, which is not a party to this case and was not involved in the Nebivolol Patent Litigation, was used to effect a $19 million payment to Watson (slip op. at 59).  The Court rejected Plaintiffs’ allegation that there was a “clear inference” Forest used the letter agreement with Moksha8 to pay off Watson as conclusory and concluded that Plaintiffs failed to plead “how value was transferred from Moksha8 to Watson” as a reverse payment (slip op. at 59).

By Sam Smith 

On May 24, 2024, the U.S. District Court for the District of Northern California, in an opinion written by Judge Araceli Martínez-Olguín, denied Sony Interactive Entertainment LLC’s (“Sony’) motion to deny class certification to the plaintiffs. Caccuri v. Sony Interactive Ent., No. 21-cv-03361-AMO, 2024 WL 2701692, at *1 (N.D. Cal. May 24, 2024). The District Court held Sony had not established that plaintiffs were bound by the class action provisions contained in the two differing agreements with Sony, but in any event Sony had waived its arbitration rights. Id. at *8, *12. Therefore, Sony’s motion to deny class certification was denied. Id. at *12.

The plaintiffs in the punitive class action alleged the discontinued sale of digital PlayStation game download cards to third-party retailers was anticompetitive conduct. Id. at *1. The plaintiffs sought to represent a class of people who purchased any digital video game content directly from the PlayStation store from April 1, 2019, through the present day. Id.

On its motion to deny class certification, Sony argued putative class members were bound by class action waivers contained in the arbitration provisions of the PlayStation 5 system license agreement the identical provision in the product license agreement. Id. at *5.  The terms of the class action waiver differed in the April 2019 and October 2020 terms of service. See id. at *6. Specifically, the language in 2019 stated that proceedings in arbitration or court could only be conducted on an individual basis, while the 2020 terms of service states that proceedings that happen in arbitration could only be conducted on an individual basis. Id. at *7. Sony, however, failed to provide effective dates for the differing agreements which overlapped the putative class period.  On this basis, the Court held that Sony had not established that plaintiffs were bound by the class action waivers contained in the varying terms of service, but granted Sony leave to renew and clarify its arguments on subsequent class certification briefing. Id. at *7, *8.   

Nevertheless, the Court assumed, without deciding, that the arbitration clauses contained in the various agreements were enforceable since to hold that plaintiffs’ waiver argument was dispositive as to Sony’s ability to enforce its arbitration rights. Id. at *9.  In this case, Sony filed multiple rounds of motions to dismiss, numerous joint case management statements were filed listing disputed legal issues, and significant discovery had been conducted. See id. at *2-4.  Finally on November 16, 2023, Sony moved to deny class certification. Id at *4.  While that motion was pending, Sony served their first set of document requests on the plaintiffs, the parties completed early neutral evaluation, as ordered by the Court, briefed two discovery disputes, filed two additional case management statements, and appeared for further case management conferences. Id.

Based upon this procedural history, the Court decided that Sony had waived their arbitration provision. Id. at *12. “[T]he test for waiver . . . consists of two elements: (1) knowledge of an existing right . . .; and (2) intentional acts inconsistent with that existing right.” Id. at *8 (quoting Hill v. Xerox Bus. Servs., LLC, 59 F.4th 457, 468 (9th Cir. 2023)).

The first element was satisfied since Sony was put on notice when the action was commenced and the plaintiffs proposed class included individuals that would be subject to the arbitration agreement, and in fact this was identified as a disputed legal issue in joint case management statements. Id. at *9. 

The second element is satisfied, where “a party generally acts inconsistently with exercising the right to arbitrate when it (1) makes an intentional decision not to move to compel arbitration and (2) actively litigates the merits of a case for a prolonged period of time in order to take advantage of being in court.” Id. (quoting Armstrong v. Michaels Stores, Inc., 59 F.4th 1011, 1015 (9th Cir. 2023)). The court ruled that Sony had done both. Id. at *12. Sony failed to compel arbitration before the deadline. Id at *9. Sony also filed two motions to dismiss and continued to respond to plaintiff’s discovery requests. Id. Sony repeatedly availed themselves to the court’s resources and never moved for relief from the obligations attendant to litigating. Id. Sony’s failure to assert their right to arbitration waived their rights to arbitration to the whole punitive class, even unnamed plaintiffs, satisfying the second prong of the waiver analysis. Id. at *12.

The Attorneys General of Indiana, Massachusetts, Nevada and Washington today joined the civil antitrust lawsuit brought by the Justice Department, 15 states and the District of Columbia against Apple in March for monopolizing multiple smartphone markets in violation of Section 2 of the Sherman Act. The department and its now expanded group of 20 co-plaintiffs filed an amended complaint in the District of New Jersey.

Proposed Consent Decree Prohibits Colleges and Universities from Infringing on College Athletes’ Freedom to Transfer Schools

Today, the Justice Department filed a proposed consent decree to prohibit the National Collegiate Athletic Association (NCAA), the largest national organization regulating intercollegiate athletics, from enforcing the Transfer Eligibility Rule, from enforcing the Rule of Restitution against anyone in connection with the Transfer Eligibility Rule and from implementing rules imposing similar restrictions between Division I colleges and universities.

*       *       *

The proposed consent decree, if approved by the court, enjoins the NCAA from enforcing the Transfer Eligibility Rule and from adopting any similar rule in the future. In order to remedy harms caused to college athletes by the Transfer Eligibility Rule, the proposed consent decree requires the NCAA to issue an additional year of eligibility to certain qualifying college athletes who were previously deemed ineligible to participate as a result of the Transfer Eligibility Rule for a season or any portion of a season.

“Free from anticompetitive rules that unfairly limit their mobility, Division I college athletes will now be able to choose the institutions that best meet their academic, personal and professional development needs,” said Assistant Attorney General Jonathan Kanter of the Justice Department’s Antitrust Division. “This resolution is a testament to the benefits of federal and state enforcers working together to ensure free markets and fair competition for all Americans.”

The amended complaint alleged that the NCAA’s one-time-transfer rule unreasonably restrained competition in the markets for athletic services in men’s and women’s Division I basketball and Football Bowl Subdivision (FBS) football, as well as for athletic services in all other men’s and women’s Division I sports. The rule forced college athletes who transfer more than once to sit on the sidelines for an entire season before they were eligible to compete in NCAA athletic competitions at their new school. The amended complaint further alleged that the restriction limited college athletes’ bargaining power and harmed both their educational and athletic experiences. The NCAA’s Division II, which had a similar Transfer Eligibility Rule, has already revised its rule to remove a year-in-residence requirement for transfer students.

As required by the Tunney Act, the proposed settlement, along with a competitive impact statement, will be published in the Federal Register. Any person should submit written comments concerning the proposed settlement within 60 days following the publication to Chief, Media, Entertainment & Communications, Antitrust Division, U.S. Department of Justice, 450 Fifth Street NW, Suite 7000, Washington, D.C. 20530. At the conclusion of the public comment period, the U.S. District Court for the Northern District of West Virginia may enter the final judgment upon finding it is in the public interest.

A copy of the complaint, consent decree and competitive impact statement can be found on the Justice Department website.

Today, the Commission issued a statement regarding its referral to the Department of Justice a complaint against TikTok, the successor to Musical.ly, and its parent company ByteDance Ltd.

See a copy of the Statement at  https://www.ftc.gov/legal-library/browse/cases-proceedings/public-statements/statement-federal-trade-commission-matter-bytedancemusically

The Federal Trade Commission is taking action against software maker Adobe and two of its executives, Maninder Sawhney and David Wadhwani, for deceiving consumers by hiding the early termination fee for its most popular subscription plan and making it difficult for consumers to cancel their subscriptions.

A federal court complaint filed by the Department of Justice upon notification and referral from the FTC charges that Adobe pushed consumers toward the “annual paid monthly” subscription without adequately disclosing that cancelling the plan in the first year could cost hundreds of dollars. Wadhwani is the president of Adobe’s digital media business, and Sawhney is an Adobe vice president.

“Adobe trapped customers into year-long subscriptions through hidden early termination fees and numerous cancellation hurdles,” said Samuel Levine, Director of the FTC’s Bureau of Consumer Protection. “Americans are tired of companies hiding the ball during subscription signup and then putting up roadblocks when they try to cancel. The FTC will continue working to protect Americans from these illegal business practices.”

After 2012, Adobe shifted principally to a subscription model, requiring consumers to pay for access to the company’s popular software on a recurring basis. Subscriptions account for most of the company’s revenue.

According to the complaint, when consumers purchase a subscription through the company’s website, Adobe pushes consumers to its “annual paid monthly” subscription plan, pre-selecting it as a default. Adobe prominently shows the plan’s “monthly” cost during enrollment, but it buries the early termination fee (ETF) and its amount, which is 50 percent of the remaining monthly payments when a consumer cancels in their first year. Adobe’s ETF disclosures are buried on the company’s website in small print or require consumers to hover over small icons to find the disclosures.

 Editor’s Note:  A copy of the complaint can be found at https://www.ftc.gov/news-events/news/press-releases/2024/06/ftc-takes-action-against-adobe-executives-hiding-fees-preventing-consumers-easily-cancelling.

The complaint charges that Adobe’s practices violate the Restore Online Shoppers’ Confidence Act.

The Commission vote to refer the civil penalty complaint to the DOJ for filing was 3-0. The Department of Justice filed the complaint in the U.S. District Courtfor the Northern District of California.

The Federal Trade Commission is sending more than $2.4 million in refunds to consumers who paid for Lurn’s business consulting programs and were deceived about the amount of money they could make from these services.

The FTC sued Lurn in September 2023, alleging that the online business coaching company made unfounded claims in order to sells its various money making programs. Lurn made outlandish claims about the kinds of money consumers could make through their programs, including that they could become a “Stay-At-Home Millionaire” with one program. For another program, the company claimed consumers could “Fail 98% of the Time & Still Be Able to Make $11,453 Per Month.” According to the complaint, the company had no information to back up these claims and very few, if any consumers actually made money with these programs.

The FTC is sending payments to 1,922 consumers who purchased coaching or mentoring programs from Lurn. Most consumers will get a check in the mail. Recipients should cash their checks within 90 days, as indicated on the check. Eligible consumers who did not have an address on file will receive a PayPal payment, which should be redeemed within 30 days.

OAKLAND — California Attorney General Rob Bonta today joined 22 attorneys general in filing an amicus brief in support of the Federal Trade Commission’s (FTC) cease-and-desist order against Intuit, maker of TurboTax. The FTC found that Intuit deceptively advertised supposedly “free” tax-filing products and ordered Intuit to cease all deceptive activity and make disclosures to cure the claims in its advertisements. In 2022, California, as part of a coalition of 51 attorneys general, announced a $141 million nationwide settlement against Intuit involving similar findings of illegal deceptive advertising. In their brief, the attorneys general argue that the FTC’s order is lawful, supported by ample evidence, and complementary to — rather than duplicative of — states’ prior settlement against Intuit.

“Every tax season, hardworking Californians put their trust in online tax filing services like TurboTax, which promise to find taxpayers the best deals,” said Attorney General Bonta. “FTC’s investigation, like our 2022 multistate investigation, found that Intuit repeatedly and deliberately broke that promise. I support FTC’s parallel enforcement authority — protecting consumers from deceptive business schemes requires everyone at the table, both states and the federal government.” 

In 2022, the FTC brought an administrative complaint against Intuit for deceptively advertising its seemingly “free” TurboTax products, which were not actually free for most users. Intuit’s advertisements consistently conveyed to consumers that they could file a tax return with TurboTax for free, and disclaimers on these advertisements were insufficient to counteract this message. Many consumers did not realize that TurboTax would not allow them to file their tax return for free until after they had invested significant time and shared sensitive personal and financial information with TurboTax.  

In the amicus brief, the attorneys general argue that the FTC’s cease-and-desist order against Intuit rightly concluded — consistent with states’ prior investigation — that Intuit engaged in illegal misconduct by depicting TurboTax as free, even though it was not free for most consumers; the order is entirely consistent with longstanding principles of both state and federal consumer protection law; and the order furthers the dual role that states and the federal government play in policing unscrupulous businesses and protecting consumers nationwide.  

The FTC allegations parallel the findings of a multistate investigation of Intuit that settled in May 2022. Attorney General Bonta, as part of a coalition of 51 attorneys general and with the Los Angeles City Attorney and Santa Clara County Counsel, announced a $141 million settlement against Intuit, resolving allegations that the California-based company deceptively advertised its “free” online TurboTax products. Although 70% of taxpayers qualified for the “IRS Free File Program,” operated by Intuit and others, less than 3% of taxpayers used it to file their returns in 2020. This abysmal rate was due in part to tricks and tactics used by Intuit to steer taxpayers away from the IRS Free File Program and toward Intuit’s paid commercial products. The multistate settlement included strong injunctive terms and $141 million in direct consumer restitution, $11.4 million of which went to approximately 370,000 Californians who were eligible for a free tax filing program and were instead deceived into paying to file their federal tax return. 

OAKLAND — California Attorney General Rob Bonta issued a statement today after the U.S. Supreme Court overturned a Second Circuit Court of Appeals decision in Cantero v. Bank of America. The Supreme Court found that the lower court failed to apply the proper standard for evaluating whether a New York state law that requires mortgage lenders to pay a 2% minimum interest rate on funds held in mortgage escrow accounts is preempted by the National Bank Act as applied to national banks. The decision allows states to enforce state consumer financial protection laws against both state and national banks so long as the state law does not prevent or significantly interfere with the exercise of power by national banks.

“The 2008 financial crisis absolutely blindsided families and homeowners who thought they were in a safe and stable place. Today, the Supreme Court has rejected a sweeping rule that would have hindered the ability of states to protect consumers from financial exploitation and abusive lending,” said Attorney General Bonta. “I celebrate today’s news and remain committed to guarding and enforcing essential consumer protection laws, today and every day.”

The U.S. Supreme Court observed that the Court of Appeals’ categorical test was improper and contrary to the Dodd-Frank Act, and would preempt virtually all state laws that regulate national banks. Because the Court of Appeals in Cantero failed to evaluate the New York law under the proper standard, the Supreme Court remanded to the lower courts to evaluate whether New York’s law is preempted by federal law.

Like the New York law at issue in Cantero v. Bank of America, California law requires financial institutions, including banks, to pay at least 2% annual interest on funds deposited in mortgage escrow accounts. Funds in an escrow account can be used by lenders to ensure timely payment of property taxes and insurance. These state minimum escrow interest laws are a simple and important consumer protection. Before the escrow interest laws were enacted, some lenders would collect significantly more in escrow than was needed to timely pay taxes and insurance, and would not pay any interest to the borrower, giving the lender essentially an interest-free loan at the borrower’s expense. The minimum escrow interest laws help ensure that borrowers are treated fairly, and reduce the incentive for lenders to collect excessive funds in escrow. At least 13 other states have similar laws in place to protect consumers.

In December 2023, Attorney General Bonta joined a bipartisan multistate coalition of attorneys general in submitting an amicus brief to the U.S. Supreme Court defending states’ rights to enforce state consumer financial protection in this case.