Harrison (Buzz) Frahn
Simpson Thacher & Bartlett LLP
Unfair competition law got anatomical in the Northern District of California with Becton, Dickinson & Co. v. Cytek Biosciences Inc., No. 18-cv-009933-MMC, 2019 WL 633008 (N.D. Cal. Feb. 14, 2019), a case involving two producers of flow cytometry products. Flow cytometry—“powerful, laser-based technology used for identifying and quantifying cellular characteristics on a cell-by-cell basis” (id. at *1 & n.3)—can be used in the diagnosis of blood diseases like leukemia. There is a significant market for this technology, with a forecasted value of over $5 billion by 2023 and $8 billion by 2025. Disputes around a new flow cytometry product form the heart of the complaint filed by Becton Dickinson (“BD”) and the answer and counterclaims filed by Cytek Biosciences (“Cytek”). BD moved to dismiss Cytek’s first cause of action, challenging Cytek’s claim for injunctive relief under California’s Unfair Competition Law (“UCL”). The court, analyzing two separate arguments under both the unfairness and unlawful prongs of California’s UCL, ultimately granted BD’s motion to dismiss with leave for Cytek to amend.
Cytek and BD both sell flow cytometry products. Id. at *1. BD allegedly controls “more than half the United States market for flow cytometers” as well as 30 to 40% of the market for reagents, which are essential to the use of flow cytometers but are marketed and sold separately. Id. at *1 & n.4. In June 2017, Cytek released a new flow cytometer called the Aurora, which Cytek alleged “depart[ed] from the traditional cytometer designs that BD and others have employed.” Id. In February 2018, BD filed a suit against Cytek alleging, inter alia, theft of trade secrets, some of which were used in the development of Aurora. See Complaint, available at http://src.bna.com/FE4. Cytek filed an answer and counterclaims in response, detailing a number of alleged actions taken by BD following the release of Aurora: (1) a BD executive threatened to have BD cease providing reagents to a Cytek customer if the customer bought an Aurora; (2) BD told a potential customer and a representative of a public research university that Cytek stole the technology used in Aurora; and (3) BD made its employees sign employee agreements that required them, for one year after employment, to “assign all right, title, and interest in any Innovation relating to Confidential Information arising” from their employment with BD. Becton, 2019 WL 633008, at *1 (internal quotation marks omitted).
Cytek asserted two causes of action in its answer and counterclaims. First, Cytek claimed injunctive relief under California Business and Professions Code § 17200 and under the “unfair” and “unlawful” prongs of California UCL. Id. at *1, 2. Second, Cytek claimed declaratory relief under 28 U.S.C. § 2201. Id. BD moved to dismiss the first cause of action. Id. at *1.
The “Unfair” Prong
The court first noted that Cytek’s first cause of action asserts a claim under California’s UCL statute, which establishes three different types of unfair competition: competition that is “unlawful, unfair, or fraudulent.” Id. at *2. In considering BD’s motion to dismiss, the court only analyzed Cytek’s claims and BD’s actions under the “unfair” and “unlawful” prongs.
As the court explained, the “unfair” prong looks to whether a business practice “threatens an incipient violation of an antitrust law, or violates the policy or spirit of one of those laws because its effects are comparable to or the same as the violation of the law, or otherwise significantly threatens or harms competition.” Id. (quoting Cel-Tec Commc’ns, Inc. v. Los Angeles Cellular Tel. Co., 20 Cal. 4th 163, 187 (1999)). Thus, this prong looks to antitrust law for the substantive analysis of whether practices are unfair. Here, Cytek alleged that BD’s threat that it would no longer supply reagents to Cytek’s customer was an unlawful attempt to “tie” its reagent sales to the customer’s agreement not to purchase Aurora, id., and violated (1) Section 3 of the Clayton Act; and (2) the Cartwright Act.
Section 3 of the Clayton Act
Section 3 of the Clayton Act makes unlawful sales or contracts that are made “on the condition, agreement, or understanding that the . . . purchaser thereof shall not use or deal in the goods . . . of a competitor,” and where such an agreement may result in “substantially lessen[ed] competition.” Id. at *3 (quoting 15 U.S.C. § 14). Section 3 extends to “tying arrangements,” which are agreements where a seller agrees to sell only on condition that the buyer “also purchases a different (or tied) product, or at least agrees that he will not purchase that product from any other supplier.” Id. (quoting N. Pac. Ry. Co. v. United States, 356 U.S. 1, 5–6 (1958)). Establishment of a tying relationship requires three elements: “(1) a tie-in between two products or services sold in different markets, (2) market power in the tying product, and (3) the tying arrangement affects a not insubstantial volume of commerce.” Id. (quoting Datagate, Inc. v. Hewlett-Packard Co., 60 F.3d 1421, 1423–24 (9th Cir. 1995)). BD challenged Cytek’s allegations under the second two elements of the test.
First, BD argued that Cytek did not “plausibly allege BD’s market power in the purported tying product market.” Id. (quoting BD’s motion to dismiss). The court agreed, assessing BD’s market power by looking at BD’s market share and uniqueness. Id. at *3–4 (citing Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 13 (1984)). Relying on Supreme Court precedents, the court found that Cytek’s allegation that BD controlled 30 to 40% of the reagent market was not enough to show market share in the reagent, i.e., the tying product. Id. at *4. Examining uniqueness, the court found that merely holding a patent over the tying product was not sufficient to show that there was no market alternative to the reagent. Id.
Second, BD argued that Cytek did not adequately allege that the tying relationship caused Cytek to lose “a not-insubstantial dollar-volume of sales in the purported tied product market.” Id. at *3 (citing BD’s motion to dismiss). The court emphasized that the test is dependent on the “total amount of business” and the effect on “dollar-volume.” Id. at *4 (quoting Fortner Enters., Inc. v. U.S. Steel Corp., 394 U.S. 495, 501 (1969)). The court found that although a single customer’s purchase can be enough to satisfy the test, Cytek failed to plead facts showing (1) that the customer was interested in purchasing from Cytek, or (2) that the tying arrangement would take a sale from Cytek. Id. Moreover, the court highlighted that because the price of a Cytek cytometer can vary by hundreds of thousands of dollars, Cytek’s failure to allege more specifically what machine the customer was interested in meant that the court could not assess whether the allegedly lost sale was “not insubstantial.” Id.
The Cartwright Act
Cytek’s Cartwright Act claims fell under Sections 16720 and 16727 of the California Business and Professions Code. Because both sections of the Cartwright Act largely track the test for a tying arrangement under the Clayton Act, the court simply summarized its previous findings that Cytek did not allege facts sufficient to show BD’s market power, the effect of the tying arrangement on Cytek’s sales, and any possibility of pecuniary loss. Id.
The “Unlawful” Prong
Like the “unfair” prong, the “unlawful” prong looks to other bodies of law to determine whether a practice constitutes a violation of California’s UCL. Here, the underlying violation need not be tied to antitrust or similar law; instead, “UCL borrows violations of other laws and treats them as unlawful practices that the unfair competition law makes independently actionable.” Id. (quoting Cel-Tech, 20 Cal. 4th at 180) (internal quotation marks omitted)). Cytek’s allegations under the “unlawful” prong included that BD made a false statement when it told a potential customer and a representative of a public research university that Cytek stole the technology used in Aurora. Id.
BD argued that Cytek’s false statement allegation did not actually indicate a violation of any underlying law. Id. at *6. Because the “unlawful” prong requires “violation of another law,” the court agreed that Cytek’s claim was insufficient to satisfy the unlawfulness test. Id. (quoting Berryman v. Merit Prop. Mgmt., Inc., 152 Cal. App. 4th 1544, 1554 (2007)).
BD further argued that even had Cytek cited California’s defamation statute, Cytek would have failed to state a claim. Id. The court agreed, finding that Cytek’s allegation did not meet the specificity required at the pleading stage because it “does not adequately allege the identity of the speaker or the recipient, when such statement was made, and the context in which the statement was made.” Id.
Lastly, the court considered whether Cytek had adequately alleged its claim for injunctive relief. The court noted that under California law, injunctive relief can be used to prevent unfair competition. Id. at *7 (citing Cal. Bus. & Prof. Code § 17203). Section 17203’s remedy for injunctive relief only applies, however, to “future harm or continuing violation.” Id. (quoting People v. Toomey, 157 Cal. App. 3d 1, 210 (1984)). Applying this premise to Cytek’s allegations, the court found that Cytek’s “tying arrangement and false statement theories are premised on . . . events which have already transpired,” id. (internal quotation marks and citation omitted), and that Cytek failed to allege facts sufficient to show that the acts were likely to recur. Id.
The court then turned to Cytek’s employee agreement theory, which Cytek argued could cause future harm because BD intended to reassert its inducement of breach of contract claims against Cytek following additional discovery. Id. However, the court noted that BD’s inducement claims had been dismissed, and that Cytek had not adequately pled facts to suggest that BD would be able to reassert them. Id. Accordingly, the court found that all of Cytek’s claims under the first cause of action were subject to dismissal, but granted Cytek leave to amend. Id. at *7–8.
Although this case resulted in the dismissal of all claims discussed, the Northern District’s decision highlights the interplay between UCL and other bodies of law, such as antitrust law and defamation law. The case also highlights the need for plaintiffs to specifically allege facts sufficient to prove not just UCL statutory law, but the underlying law from which the UCL claim “flows.”