Distribution, Competition, and Antitrust / IP Law

N.D. Cal. Just Opened the Damages Umbrella

English: Opened umbrella

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In County of San Mateo v. CSL, Limited, Case No. 3:10-cv-05686-JSC (N.D. Cal. Aug. 20, 2014) (Corley, M.J.), the Northern District of California held that California’s antitrust law, the Cartwright Act, allows the recovery of umbrella damages.  If the decision stands or is upheld, it could stimulate a new wave of antitrust litigation.

Umbrella damages are damages due to overcharges paid to non-conspirators who raise their prices because they are protected by the cartel’s price “umbrella.”  Federal courts, including the Ninth Circuit, have predominantly held that such damages are too speculative to be recovered.

In CSL, Magistrate Judge Corley held that the federal courts’ reasoning — which derives from the Illinois Brick doctrine which bars indirect purchaser claims under the Sherman Act — is not applicable to the Cartwright Act, which does allow for indirect purchaser suits.  The case reaches a conclusion opposite to that of the court in In re TFT-LCD (Flat Panel) Antitrust Litigation, 2012 WL 6708866 (N.D. Cal. Dec. 26, 2012).

It will be very interesting to see how this decision holds up.  It is a boon to antitrust plaintiffs, and a problem for antitrust defendants.

A copy of the decision is attached.

Order – Doc 146 – Cnty San Mateo vs CSL – 10cv05686

More Evidence that California May No Longer Follow the Per Se Rule in Vertical Pricing Fixing Cases

 In Kaewsawang v. Sara Lee Fresh, Inc., Case No. BC360109 (Cal. Los Angeles Superior Ct. May 6, 2013), the trial court dismissed a challenge to Sara Lee’s pricing practices brought under California’s state antitrust law, the Cartwright Act.

The plaintiffs were a purported class of distributors of Sara Lee products, and challenged Sara Lee agreements with chain retailers that gave Sara Lee the right to set pricing (to the chain stores) for Sara Lee products. The distributor agreements required the distributors to comply with the terms of the Sara Lee-chain store agreements.

In dismissing the claim, the court first ruled that plaintiffs had not alleged a price-fixing allegation. The court’s discussion is somewhat unclear, but it appears to have rejected an argument that there was some sort of horizontal agreement between and among Sara Lee and the chain stores.

The court then turned to the question of per se unlawful vertical price-fixing, and held that, despite the California Supreme Court’s decision in Mailand v. Burckle, 20 Cal. 3d 367 (1978), following the U.S. Supreme Court’s decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007), “it remains unlikely that the Mailand’s court holding is still applicable . . . .”

The court then rejected the plaintiffs’ rule of reason claim for vertical price fixing.

It is conceivable that the court did not even need to reach the issue.  Unlike the traditional vertical price-fixing scenario, Sara Lee apparently did not agree with its distributors on downstream pricing — it had the power to set the downstream pricing directly.  The distributors were more similar to middlemen or agents than true distributors with pricing authority.

Sara Lee is but one trial court decision, but it is further evidence that California courts will be receptive to arguments based on developments in federal law that vertical price-fixing is not per se unlawful.

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Court of Appeal Rules Cartwright Act Does Not Reach Premerger Conduct

Merger

In State ex rel. Van de Kamp v. Texaco, Inc., 46 Cal. 3d 1147 (1988), the California Supreme Court held that the Cartwright Act does not reach mergers and acquisitions. In Asahi Kasei Pharma Corp. v. CoTherix, Inc., No. A129146 (Cal. Ct. App. 1st Dist. March 5, 2012), the Court of Appeal extended the Texaco rule to premerger activity, finding such activity to be beyond the reach of California’s main antitrust law, the Cartwright Act. Whether the decision immunizes all premerger agreements from Cartwright Act scrutiny is not perfectly clear, given the somewhat peculiar facts of the case.

In Asahi, the plaintiff argued that the Texaco rule does not apply to premerger activity.  The plaintiff developed and marketed a pharmaceutical product, and contracted with CoTherix to commercialize the product in the United States. Asahi’s competitor, Actelion, acquired CoTherix, and shortly thereafter discontinued development of plaintiff’s product. Asahi alleged that one of Actelion’s goals in acquiring CoTherix was to terminate the development of Asahi’s product, and that Actelion directed CoTherix to give Asahi false assurances after the merger was announced but before it was completed.

Asahi sued CoTherix and Actelion under the Cartwright Act, alleging that the premerger activity constituted a “combination” by which the defendants conspired together to mislead Asahi about Actelion’s intentions. Asahi alleged that had it known about Actelion’s true intentions, under its licensing agreement with CoTherix, Asahi could have terminated the agreement and sought injunctive relief. However, Asahi did not challenge the merger itself as unlawful, nor did it allege a premerger meeting of the minds; instead, it alleged that Actelion acted with anticompetitive intent.

In affirming a summary judgment for the defendants, the Court of Appeal discussed the Texaco rule, and declined to limit its application in the context of premerger activities. The court reviewed various federal precedents concerning actionable premerger activity, but distinguished them on the grounds that most related to Sherman Act Section 2, which has no counterpart in the Cartwright Act. Although Section 1 of the Sherman Act “may, at least under certain circumstances, reach premerger anticompetitive conduct, dependent upon the economic reality of the acquired and acquiring entities as independent actors . . . . Asahi directs our attention to no California case, and we have found none, applying the Cartwright Act to penalize conduct during the merger process that would unquestionably be exempt from antitrust scrutiny upon the consummation of the merger.”

Assuming a merger that is otherwise lawful, “the combination inherent in the merger is what eliminates competition that would otherwise exist, and which makes possible restraints that could not otherwise be achieved.” CoTherix’s loss of independent decision-making regarding the development of Asahi’s product, and the ultimate implementation of business objectives defined by Actelion as the parent company, “were inherent in the combination between the two companies. It is difficult to see how our antitrust policies are furthered by saying that parties may not, in the process of merging, reach agreement to do that which the combined entity may freely do.”

Even assuming that Actelion and CoTherix remained capable of conspiring in the premerger period, the court also found that Asahi had failed to present a viable Cartwright Act claim because it failed to produce evidence of any premerger meeting of the minds. The alleged anticompetitive purpose was attributed only to Actelion and not to CoTherix. Therefore, there was no combination of capital, skills, or acts by two or more persons for the purpose of preventing competition — a prerequisite for invoking the Cartwright Act. The only premerger agreement alleged between the defendants was an agreement not to comply with the change of control provision of Asahi’s license agreement, but, according to the court, that agreement was not a Cartwright Act violation because it was not an agreement to restrain competition. Rather, the goal and purpose of this alleged “conspiracy” was to achieve a merger.

Does Asahi eliminate all forms of merger “gun jumping” claims under the Cartwright Act? For example, if premerger entities conspire to fix prices, would such behavior be immune under the theory that the merged firm can set its own prices and is an economically unitary entity that cannot conspire with itself? The Asahi court specifically noted that although the plaintiff alleged that, had it known of Actelion’s true intentions, it could have declared a breach of its licensing agreement with CoTherix and sought injunctive relief, Asahi failed to suggest how it could have successfully enjoined the merger, either as a matter of contract law or under the Cartwright Act. So, in effect, its “injury” was the result of the merger, which was outside the Cartwright Act. The same reasoning may or may not apply to premerger price fixing, which might be considered an injury independent from any merger.  Even if the same reasoning does apply, there likely must be some temporal limiting principle; otherwise the Asahi holding would swallow up the rule against price fixing, and it seems unlikely that the Legislature intended such a result by not including mergers within the scope of the Act.

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