Photo of Chelsea Black

Chelsea Black focuses her practice on antitrust litigation and class action defense. Chelsea has defended clients in complex civil litigation against claims of monopolization and conspiracy under various federal and state competition and consumer protection laws. Chelsea has also represented clients through civil and criminal government investigations concerning allegations of price-fixing and agreements not to compete. Read Chelsea Black's full bio.

WHAT HAPPENED:

  • On October 2, 2017, the US Court of Appeals for the Third Circuit unsealed its opinion in Valspar Corp. v. E.I. Du Pont De Nemours & Co., No. 16-1345 2017 WL 4364317 (3d Cir. Sept. 14, 2017) in which the court affirmed the district court’s grant of summary judgment for defendant on the grounds that plaintiff lacked sufficient evidence to allege a conspiracy to fix prices.
  • Valspar alleged that titanium dioxide suppliers engaged in price-fixing, citing evidence that the manufacturers announced 31 price increases in a twelve year period and other circumstantial evidence. at *5. The parties agreed that the titanium dioxide market is oligopolistic, with a handful of firms, substantial barriers to entry, and no substitute products. Id. at *1.
  • After Valspar settled with all defendants but DuPont, the latter moved for summary judgment. The district court found that Valspar lacked evidence of an actual agreement among defendant suppliers to fix prices. at *1.
  • The Third Circuit agreed with the district court and found that Valspar’s argument failed on two grounds. First, the court explained that Valspar neglected to consider conscious parallelism when it claimed that it was “inconceivable” that defendants executed identical price increases on 31 occasions without a conspiracy. at *5. Price movement in an oligopoly is expected to be interdependent, as rational decision makers anticipate the movements of other firms. Second, Valspar was required to show that defendants’ parallel pricing “went beyond mere interdependence and was so unusual that in the absence of advance agreement, no reasonable firm would have engaged in it.” Id. at *6 (quoting In re Baby Food Antitrust Litig., 166 F.3d 112, 135 (3d Cir. 1999)).

WHAT THIS MEANS:

  • The Valspar case is interesting in that it is an opt-out case from the In re Titanium Dioxide class action litigation, in which the United States District Court for the District of Maryland denied defendants’ motion for summary judgment based on the same evidence that here allowed the District of Delaware, as affirmed by the Third Circuit, to grant it. The Third Circuit attributed the different outcomes in the class and opt-out cases to the fact that the District of Maryland—which sits in the US Court of Appeals for the Fourth Circuit—is not bound by Third Circuit precedent while the District of Delaware is so bound. at *11 (“This resulted in the Maryland court applying a standard quite different from the one we have developed and that the [Delaware court] applied.”).
  • The opinion clarifies the evidence required under Third Circuit precedent to prove a conspiracy in an oligopolistic industry. The court explained that in oligopoly cases, evidence that price increases are not correlated to supply or demand is “largely irrelevant.” at *7. Awareness among defendants of the conscious parallelism is similarly not enough. Id. at *4 n.3. Plaintiffs must show proof of an explicit, manifest agreement. Id. A plaintiff alleging a conspiracy among defendants may not rely on “ambiguous evidence alone” to survive summary judgment. Id. at *5 (quoting In re Chocolate Confectionary Antitrust Litig., 801 F.3d 383, 396 (3d Cir. 2015)).

Azim Makanojiya founded Zaappaaz Inc. as a nineteen-year-old university student and quickly turned it into a multi-million dollar business.

WHAT HAPPENED:

  • On Tuesday, August 7, online retailer Zaappaaz Inc. and its twenty-nine-year-old president and founder, Azim Makanojiya, agreed to plead guilty for conspiring to fix the prices of “customized promotional products” such as silicone wristbands and lanyards.
  • According to an Information filed in the United States District Court for the Southern District of Texas, the company  “engaged in a conspiracy with other persons and entities engaged in the sale of customized promotional products,” which was carried out in part “via text and online messaging platforms.”  The alleged conspirators reportedly used social media platforms Facebook, Skype and WhatsApp to coordinate their price-fixing efforts.
  • Acting Assistant Attorney General Andrew Finch of the Department of Justice’s Antitrust Division explained the significance of the charges in a press release, stating that, “[a]s today’s charges show, criminals cannot evade detection by conspiring online and using encrypted messaging.”  “In addition,” he continued, “today’s charges are a clear sign of the Division’s commitment to uncovering and prosecuting collusion that affects internet sales.  American consumers have the right to a marketplace free of unlawful collusion, whether they are shopping at retail stores or online.”
  • While Zaappaaz Inc. has agreed to pay a $1.9 million criminal fine, the Department of Justice has not yet indicated what sentence it will support for the company’s president, Azim Makanojiya. He could face up to 10 years in prison for violating the Sherman Act, though in practice sentences tend to be much shorter, especially when defendants agree to cooperate with an ongoing investigation, as both defendants have done here.
  • At this time, the Department of Justice has not named any of Zaappaaz Inc.’s competitors as alleged conspirators, but other companies in the promotional products industry are reportedly under investigation.

WHAT THIS MEANS:

  • The successful prosecution of Zaappaaz Inc. and Makanojiya reflects efforts by the Antitrust Division to keep pace with technological developments while policing conspiratorial activity in both the online and brick-and-mortar arenas.
  • Meanwhile, its decision to file charges against Makanojiya is consistent with a trend of holding individual executives accountable for their role in corporate criminal activity.
  • Retailers should take note that the Division’s enforcement efforts are not limited to concentrated markets for commodities or essential services; sellers of low-value, readily abundant consumer goods can find themselves under the Division’s scrutiny as well.

On July 19, 2017, the Second Circuit vacated the convictions and dismissed the indictments of two individuals accused of playing a role in the manipulation of the London Interbank Offered Rate (LIBOR). United States v. Allen, No. 16-898-cr, Slip Op. at 3 (2d Cir. July 19, 2017). The ruling was based on the Fifth Amendment to the US Constitution, which provides that “[n]o person . . . shall be compelled in any criminal case to be a witness against himself.” US Const. amend. V. The Second Circuit’s decision clarifies that this protection against self-incrimination is an “absolute” “trial right” that applies to all criminal defendants in US courts (including non-citizens) and to all compelled testimony (including testimony given during a foreign government’s investigation). United States v. Allen, No. 16-898-cr, Slip Op. at 55. The court’s clarification of the Fifth Amendment’s scope has important implications for US antitrust enforcers prosecuting international cartels and for individuals ensnared in cross-border criminal investigations alike.

Continue Reading Second Circuit Clarifies Fifth Amendment Law, with Implications for US Prosecution of International Cartels

On March 22, 2016, the U.S. Court of Appeals for the Sixth Circuit allowed a claim to proceed under § 1 of the Sherman Act against four hospitals acting as a single network under a joint operating agreement.  Med. Center at Elizabeth Place, LLC v. Atrium Health Sys., No. 14-4166 (6th Cir. Mar. 22, 2016).  A divided panel reversed the ruling of the district court, which had granted summary judgment for the defendant hospitals on the premise that they were operating as a single entity and therefore had not engaged in concerted action subject to § 1. The Sixth Circuit’s opinion sheds light on a topic of growing importance in the health care industry: how to distinguish a lawful joint venture from a horizontal conspiracy.

To answer that question, the majority examined “the nature of the business relationship among the defendants, focusing on whether that relationship remain[ed] that of separate, competing entities or whether there [was] a single center of decisionmaking.”  Id. at 10 (citing American Needle, Inc. v. Nat’l Football League, 560 U.S. 183 (2010)). Even though the joint venture was “a separate corporate entity with its own management structure” and the “joint operating agreement provide[d] for sharing revenue pursuant to an agreed upon formula,” the court decided the record supported a conclusion that defendants were separate actors capable of conspiring under § 1. Id.  In support of this conclusion, the court cited evidence that the intention behind the joint venture was to prevent the plaintiff hospital from entering the local health care market. Id. at 4 (for example, evidence that defendant’s executive told plaintiff, “you are the enemy [and] this is war”).  Additional facts supporting this conclusion included that the hospitals “remain[ed] separate legal entities, each with their own assets, filing their own tax returns and maintaining a separate corporate identity with its own CEO and Board of Directors.” Id. at 11. Further, the hospitals continued to compete with each other for physicians and patients and to make their own decisions regarding staffing and patient care.  Id.

In recent years, as antitrust regulators have subjected mergers in the health care arena to increasing scrutiny, many have viewed joint operating agreements as an attractive alternative. The Sixth Circuit’s opinion in Elizabeth Place serves as an important reminder that courts “look[] beyond labels” in distinguishing lawful joint venture activities from concerted conduct subject to § 1.  Id. at 7. In other words, a formal joint operating arrangement will not spare accused conspirators from antitrust scrutiny, particularly in the face of evidence of anticompetitive intent. Companies should exercise caution to avoid the appearance that a joint venture is being used as a tool to harm competitors or eliminate competition. In both internal documents and external communications, companies should avoid the use of war-like words that may signal anticompetitive intent or effect. It is always prudent to involve counsel in communications with competitors, as these communications pose the highest level of antitrust risk.

 

On May 14, 2015, the Southern District of New York issued two opinions in Laumann v. Nat’l Hockey League, No. 12-cv-1817, excluding plaintiffs’ damages expert under Daubert and denying plaintiffs’ motion to certify a damages class. The court did, however, certify a class under Federal Rule of Civil Procedure 23(b)(2) for the purpose of pursuing injunctive relief. The case is part of a growing body of case law in which courts have considered Daubert motions at the class certification stage. The plaintiffs had sought to certify two classes of individuals who purchased “out-of-market” baseball or hockey packages, either online or through a television service provider.

The plaintiffs in Laumann alleged that agreements between the defendants—sports leagues, regional television networks that produce each team’s games, and television service providers—violated Section 1. The challenged restraint was “territorial exclusivity,” the restriction on regional networks from selling content to consumers who live outside the network’s geographic market. Instead, a Yankees fan who lives in Iowa, for example, could only watch Yankees games by purchasing an “out-of-market package,” a bundle that includes all games except games involving teams from the Iowa region. The agreements required “blackouts” of games in class members’ home team areas, thereby requiring out-of-market package subscribers to also subscribe to a local cable package in order to watch their favorite teams. Plaintiffs’ theory of damage was that, without the challenged restraint, regional sports networks would sell content directly to out-of-market fans, and therefore consumers would have a second option, which would put downward pressure on the price of the all-inclusive out-of-market package. The court held that having fewer options and paying higher prices were distinct forms of injury that were both recognizable. Laumann, 2015 WL 2330107 (class certification opinion), at *8.

The court decided to exclude the opinion of plaintiffs’ damages expert because his model was “largely untethered from the actual facts of th[e] case.”  Laumann, 2015 WL 2330036 (Daubert opinion), at *11.  Therefore, the model was not a “scientifically-reliable way to predict with some precision the prices of [out-of-market] telecasts,” and it had to be excluded. Id. at *10. The expert, Dr. Noll, used the defendants’ viewership data to create a model with variables estimated by statistical techniques. The court noted that “many pages of Dr. Noll’s declarations consist[ed] almost entirely of complex equations beyond the comprehension of the Court or the lawyers in this case.” Id. At *5. Defendants’ economist called the model “junk science” that “relie[d] too heavily on mathematical assumptions and random error, and too little on actual data about consumers and their preferences,” and in effect the court agreed. Id. at *7, *14.

Regarding class certification, the court held that, with Dr. Noll’s opinion excluded, a class could not be certified under Rule 23(b)(3). The court noted that Rule 23(b)(3) requires plaintiffs to “show that they can prove, through common evidence, that all class members were . . . injured by the alleged conspiracy.” Laumann, 2015 WL 2330107 (class certification opinion), at *9 (internal quotation marks omitted) (quoting Sykes v. Mel S. Harris & Assoc., 780 F.3d 70, 82 (2d Cir. 2015)). “Here, Dr. Noll’s model was the common evidence—and the model [was] excluded.  Therefore, no (b)(3) class [could] be certified.” Id. The court went on to hold that “every class member has suffered an injury, because every class member, as a consumer in the market for baseball or hockey broadcasting, has been deprived of an option— à la carte channels—that would have been available absent the territorial restraints,” and this injury “unite[d] the class.” Id. at *11. It therefore allowed the plaintiffs to proceed as a class to pursue injunctive relief under Rule 23(b)(2).

 

Earlier this week, the Federal Trade Commission (FTC) published an article that offers guidance on the “failing firm” or “flailing firm” defense often invoked in the hospital merger context.  The article, written by Debbie Feinstein and Alexis Gilman of the Bureau of Competition, clarifies the circumstances under which this defense is and is not available.

At the outset, Feinstein and Gilman point out the basic requirements for establishing a failing firm defense, as set forth in § 11 of the Horizontal Merger guidelines:

  1. the company is unable to meet its obligations as they come due;
  2. the firm would not be able to reorganize successfully in bankruptcy; and
  3. it has made unsuccessful good-faith efforts to elicit reasonable alternative offers that would keep its assets in the relevant market and pose a less severe danger to competition than does the proposed merger.

The article goes on to emphasize an additional nuance required for the defense—that the acquiring company is the only available purchaser.  This goes hand-in-hand with requirement three listed above.  As an example, the authors describe a recent FTC investigation that involved “a hospital that was clearly failing.”  The hospital’s bankrupt status did not calm the FTC’s concerns about the transaction, because the FTC learned that there was an interested alternate purchaser who did not pose the same competitive risks as the chosen acquirer.

Even if the acquisition price of a “failing” or “flailing” firm is below the Hart-Scott-Rodino reporting threshold, potential acquirers should assess the antitrust risk associated with the transaction and be sure to factor any costs associated with that risk into the sticker price.  The failing or flailing firm should be prepared to demonstrate the efforts it made to find an acquirer.  Non-reportable transactions are within the FTC’s reach and are often on the agency’s radar, particularly in the health care context.

The full text of the article is available here.

On January 6, 2015, Makoto Horie of Toyoda Gosei North America pled guilty to the United States Department of Justice (DOJ) for conspiring to fix the prices of automotive hoses sold to U.S. companies.  Mr. Horie was sales general manager for Toyoda Gosei in Japan.  He will serve one year and one day in a U.S. prison and pay a $20,000 criminal fine for participating in the conspiracy between March 2007 and September 2010.

Toyoda Gosei pled guilty in September 2014 to price-fixing and bid-rigging for automotive hoses, airbags and steering wheels.  Unlike Toyoda Gosei’s plea agreement, Mr. Horie’s Information did not allege any wrongdoing related to automotive airbags or steering wheels.  Including Mr. Horie and his former employer, 29 individuals and 32 companies have now admitted guilt to the DOJ.  These individuals and entities have agreed to pay over $2.4 billion in fines.

Mr. Horie’s plea agreement is subject to approval by the United States District Court for the Northern District of Ohio.

On January 6, 2015, the Second Circuit granted defendants’ motion for an expedited appeal but denied their motion for a stay in New York v. Actavis PLC, 14-4624 (2d Cir. Jan. 6, 2015).  Defendants are manufacturers of Namenda, a brand name pharmaceutical prescribed to patients with moderate to severe Alzheimer’s disease.  New York Attorney General Eric Schneiderman filed suit against the defendants in September 2014, alleging that the defendants’ plan to cease production of Namenda IR, a twice-daily instant release formulary whose patent expires in April 2015, was motivated by anticompetitive concerns and violated federal and state antitrust laws.  According to Schneiderman, defendants’ motive for ceasing sales of Namenda IR was to force patients to switch to Namenda XR, an extended release formulary of the drug with a longer patent life.  Converting patients to Namenda XR before the expiration of the Namenda IR patent would negate generic manufacturers’ ability to win market share through the automatic substitution of generic drugs for brand name prescriptions required under many state laws because the generic instant release formulary is not “bioequivalent” to the extended release version.

The Southern District of New York found that the “hard switch” from Namenda IR to XR would injure competition and consumers and granted the state’s motion for a preliminary injunction on December 11, 2014.  Defendants presented evidence that switching to the extended release formula would benefit patients by reducing the number of doses they would need to take each day, which can be particularly beneficial for patients with memory problems.  However, the court concluded that the purpose of defendants’ plan was to nullify state generic substitution laws and that defendants failed to establish any cognizable harm that would result from an injunction requiring them to continue selling Namenda IR.  The harm defendants sought to avoid, the court explained, was the intended effect of the federal and state regulatory regimes at play: increased competition.

The Second Circuit’s January 6 order was brief and not accompanied by an opinion.  The court held that the defendants had not met the standard for a stay of the injunction, citing In re World Trade Center Disaster Site Litigation, 503 F.3d 167, 170 (2d Cir. 2007).  The court granted their motion for an expedited appeal and ordered them to submit an expedited briefing schedule within seven days.

On October 14, 2014, the Eastern District of Pennsylvania denied a motion for reconsideration brought by members and affiliates of the former Eastern Mushroom Marketing Cooperative (EMMC).  In re Mushroom Direct Purchaser Antitrust Litig., No. 06-0620 (E.D. Pa. Oct. 14, 2014).  In 2009, the court denied defendants’ motion for partial summary judgment, which argued that defendants were immune from antitrust liability as members of an agricultural cooperative under the Capper-Volstead Act, 7 U.S.C. § 291.  The court gave two reasons for denying the motion: (1) the EMMC allegedly conspired with entities that were not engaged in agricultural production and (2) non-grower M. Cutone’s membership in the cooperative destroyed Capper-Volstead immunity.  Defendants moved for reconsideration in light of intervening authority from the Supreme Court in American Needle Inc. v. Nat’l Football League, 560 U.S. 783 (2010), and the Third Circuit in Deutscher Tennis Bund v. APT Tour, Inc., 610 F.3d 820 (3d Cir. 2010).

Defendants argued that, under American Needle, an unlawful conspiracy could not exist between an EMMC grower member and its affiliated distributor.  The court analyzed American Needle and emphasized that “substance, not form, should determine whether a[n] . . . entity is capable of conspiring under § 1 [of the Sherman Act].”  Mushroom, No. 06-0620 at 6 (quoting American Needle, 560 U.S. at 195).  The court held that its prior conclusion that member Kaolin/South Mill and its distribution centers were not a single entity was undisturbed by American Needle.  That the entities were “separate decision makers pursuing separate economic interests” was strongly evidenced, in the court’s eyes, by litigation that had occurred between the entities.  Mushroom, No. 06-0620 at 9.

Defendants also argued that participation in the cooperative by M. Cutone, a non-grower affiliate of grower-member M&V Enterprises, was protected under Capper-Volstead under the same rationale behind the intra-enterprise conspiracy doctrine discussed in American Needle.  The court held that this argument “misconstrue[d] the nature of the single entity defense. . . . Merely because two parties are considered to be a single entity for the purpose of a conspiracy claim under American Needle does not require that they be similarly considered in order to determine whether the cooperative’s membership included non-growers.”  Mushroom, No. 06-0620 at 12.  Therefore, M. Cutone’s “power to participate in the control and policy making of the association through voting . . . destroyed the availability of Capper-Volstead immunity for the cooperative.”  Id. at 11-12 (internal quotation marks omitted).

The court certified both issues for interlocutory review under 28 U.S.C. § 1292(b), as well as the question of whether a cooperative member’s good faith reliance on the advice of counsel can shield it from antitrust liability.  It remains to be seen whether the Third Circuit will take up the appeal.

On September 30, 2014, the Southern District of New York reconsidered the Commodities Exchange Act (CEA) and Sherman Act claims brought against Louis Dreyfus Commodities B.V. and its affiliates in In re Term Commodities Cotton Futures Litigation, 12 Civ. 5126 (ALC)(KNF) (S.D.N.Y. Sept. 30, 2014).  The plaintiffs, cotton futures traders, alleged that the defendants manipulated the price of cotton futures by “unreasonably and uneconomically demanding delivery of certificated cotton in fulfillment of futures contracts,” among other allegations of manipulative behavior.  In December 2013, the court denied defendants’ motion to dismiss, and defendants subsequently moved for reconsideration.  On reconsideration, the court dismissed plaintiffs’ § 1 claim under the intra-enterprise conspiracy doctrine set forth in Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984), but declined to dismiss the CEA or § 2 claims.

The court began its analysis by emphasizing the narrow holding of Copperweld.  It noted that Copperweld’s holding was limited to the relationship between “a parent and its wholly owned subsidiary”; where the relationship between two conspirators is anything less than complete ownership, lower courts “must draw from the analysis in Copperweld without the benefit of a bright line rule.”  Cotton, 12 Civ. 5126 at 6-7.  While the court rejected an interpretation of the intra-enterprise conspiracy doctrine that “Section One claims are not viable where the only named coconspirators are a parent corporation and its subsidiaries” as an overstatement of the law, it did not go so far as to hold that the doctrine only applies to parents and their wholly owned subsidiaries.

The five defendants in Cotton were all related through a web of parent-subsidiary relationships.  The plaintiffs did not specify whether each subsidiary was wholly owned, or clearly plead the nature of the defendants’ relationships.  The court held that, viewing the allegations in the light most favorable to the plaintiffs, it could not conclude that the allegations supported “a reasonable inference that Defendants ha[d] ‘separate corporate consciousnesses.’”  Cotton, 12 Civ. 5126 at 10.  For the defendants that were not wholly owned by other defendants, “the allegations portray[ed] the other Defendants as having ‘ownership’ and ‘control over’ them and giving ‘directions to’ them.  Nothing in the [complaint] demonstrate[d] a rational possibility that Defendants were ‘previously separate and competing entities [that combined] to act as one for their common benefit.’”  Id.

Regarding the § 2 claim, defendants argued that the court should apply the pleading standards for predatory pricing claims established by the Supreme Court in Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., Inc., 549 U.S. 312 (2007).  The court disagreed and concluded that Weyerhaeuser was inapplicable to these facts because the case did not present a classic predatory bidding scheme.  Due to the procedural posture of the case, the court did not discuss any additional issues related to defendants’ alleged monopolization.  Though it did not dismiss the § 2 claim, the court noted “the delicate factual balance in which Plaintiffs’ remaining claims hang” and granted defendants leave to move for summary judgment before the plaintiffs could move for class certification.