Distribution, Competition, and Antitrust / Intellectual Property (IP) Law

Is the California Unfair Practices Act a Free Pass on Motions to Dismiss?

Probably not, but UPA claims can be tough to defeat at the motion to dismiss stage. Witness Rheumatology Diagnostics Laboratory, Inc. v. Aetna, Inc., 2013 U.S. Dist. LEXIS 151128 (N.D. Cal. Oct. 18, 2013) (Orrick, J.), where the court dismissed many of the plaintiffs’ Sherman Act Section 1 and Section 2 claims. However, the court refused to dismiss the plaintiffs’ below-cost pricing claims against Quest Diagnostics under the UPA, reasoning:

The UPA “appears to be a painstaking endeavor by the legislature to combat the abuses which the business interests have deemed unfair practices in the competitive field.” To require the plaintiffs to plead with an unreasonable degree of specificity would undermine the UPA’s admonition that the statute “shall be liberally construed that its beneficial purposes may be subserved.” Cal. Bus. & Prof. Code § 17002. Much of the information that must be pleaded—Quest’s costs and the prices it charges by product—is in Quest’s hands and not easily accessed by the plaintiffs. The Court does not “forget that proceeding to [ ] discovery can be expensive” or that the plaintiffs must meet their burden under Federal Rule of Civil Procedure 8. However, even in a case where the plaintiff “fail[ed] to allege a definite cost of doing business,” the California Court of Appeal held that “it would serve no useful purpose to require a speculative allegation of cost which adds nothing to the notice given by the pleadings in their present state. Accordingly, we view the present pleadings as sufficient under section 17043 and find error in sustaining the demurrer thereto.”

In sum, “the determination of cost is best approached on a case-by-case basis.” So long as the method used was not “arbitrary or irrational,” it is sufficient for pleading purposes. Finding that the plaintiffs adequately plead their UPA claim based on the information alleged in the [complaint] does not mean that the information or calculations provided are necessarily correct or even that the plaintiffs are likely to succeed in proving their claim. Quest may dispute the details of the calculation method later to the trier of fact. However, the purpose of pleading is to put a defendant on sufficient notice of its alleged wrongdoing, and the plaintiffs have done so here.

(Citations omitted). This liberal standard – coupled with the fact that a UPA plaintiff probably need not prove a dangerous probability of recoupment after the predatory period, a requirement under federal law – makes it difficult to target these claims on a motion to dismiss.

A Useful Reminder About Sham Litigation as Exclusionary Conduct

In Surface Supplied, Inc. v. Kirby Morgan Dive Systems, Inc., 2013 U.S. Dist. LEXIS 143478 (N.D. Cal. Oct. 3, 2013) (Chesney, J.), the Court dismissed attempted monopolization and monopolization counterclaims with leave to amend. The Court found a number of defects in the claims, which were grounded in allegations that Kirby had filed anticompetitive litigation.

The Court drew a sharp line between two types of sham litigation claims. If the alleged anticompetitive behavior consists of bringing a single sham lawsuit (or a small number of such suits), the antitrust plaintiff must demonstrate that the lawsuit was (1) objectively baseless and (2) a concealed attempt to interfere with the plaintiff’s business relationships. Kottle v. Nw. Kidney Centers, 146 F.3d 1056, 1060 (9th Cir. 1988). On the other hand, if the alleged anticompetitive behavior is the filing of a series of lawsuits, the question becomes not whether any one of them has merit – some may turn out to, just as a matter of chance – but whether they are brought pursuant to a policy of starting legal proceedings without regard to the merits and for the purpose of injuring a market rival. See id.

SSI alleged a “pattern and practice” of filing a series of lawsuits, but identified only two. Therefore, the Court held, it had not alleged a series-type sham litigation claim. But if SSI intended to rest its claim on anticompetitive behavior from the two lawsuits it expressly referenced, it failed to plead any facts showing those lawsuits to be objectively baseless. “In sum, SSI fails to adequately plead the first element of a claim for attempt to monopolize.”  (The monopolization claim failed for the same reason.)

In short, “sham” litigation claims require appropriate factual support – conclusory, naked allegations are often insufficient.

If Your Allegations Don’t Establish a Price Effect, You May Lack Antitrust Standing

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ipod shuffle (Photo credit: sucelloleiloes)

In Somers v. Apple, Inc., Case No. 11-16896 (9th Cir. Sept. 3, 2013), the Ninth Circuit affirmed the district court’s dismissal of a putative class action against Apple, Inc., alleging antitrust violations in connection with Apple’s iPod and its Tunes Music Store.  The case illustrates the dangers of failing to adequately allege a price effect caused by a defendant’s purportedly anticompetitive conduct.

On behalf of a putative class, Somers alleges that she suffered injury in the form of inflated music prices. The premise of her overcharge theory is that Apple used software updates to thwart competitors (e.g., Real Networks) and gain a monopoly in the music download market, which permitted Apple to charge higher prices for its music than it could have in a competitive market. Specifically, Somers alleges that if Apple had not engaged in anti-competitive conduct to exclude Real Networks from the market, “it would have had to price Audio Downloads to compete on price with Real Networks.”

(Slip Opinion at 19-20.)

But, unfortunately for Somers, her allegations did not square with her overcharge theory.  Apple’s price for music downloads remained stable before the time it allegedly acquired a monopoly and afterwards.

Moreover,

if Somers’ overcharge theory were correct, then Apple’s music prices from 2004 to 2008 were supracompetitive as a result of software updates that excluded competition, and the emergence of a large seller such as Amazon would have caused iTS [iTunes] music prices to fall. But Somers alleges no such price reduction. Somers’ overcharge theory is thus implausible in the face of contradictory market facts alleged in her complaint. As Somers herself acknowledges, under basic economic principles, increased competition—as Apple encountered in 2008 with the entrance of Amazon—generally lowers prices.

(Id. at 20.)  “The fact that Apple continuously charged the same price for its music irrespective of the absence or presence of a competitor renders implausible Somers’ conclusory assertion that Apple’s software updates affected music prices.”  (Id. at 21.)

The Ninth Circuit agreed that price “is only one possible indicator in assessing competitive markets.  Monopoly power may be evaluated by other factors, such as barriers to entry or structural evidence of a monopolized market.”  (Id. at 21.)  “But if Apple did not charge inflated prices for its music, then this fact contradicts Somers’ overcharge theory, and there would be no basis for damages in the first place.”  (Id.)

While Somers suggested that it was conceivable that Apple’s music was not priced higher because of some other factor, such as superior product or greater efficiency, the court found that to state a plausible antitrust injury, a plaintiff must allege facts that rise beyond mere conceivability or possibility.  “We are only left to speculate on what factors could have permitted Apple to charge 99 cents continuously.”  (Id. at 22.)  Somers therefore failed to plead a plausible, non-speculative claim.

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Don’t Forget About State Fair Dealership Laws

Many states have “fair dealership laws.”  These laws can trigger special duties for suppliers or manufacturers and can support claims by dealers.

But it’s not always easy for a dealer to establish that one of these laws applies.  In a recent decision, the court dismissed a claim under the Wisconsin Fair Dealership Law.  See Stucchi USA, Inc. v. Hyquip, Inc., Case No. 09-CV-732 (E.D. Wis. Apr. 20, 2011).

This decision is also interesting in its dismissal of a breach of contract claim (alleged breach of an oral agreement to appoint a distributor as an exclusive distributor).  “Unfortunately for [the distributor], the June 18, 2009 termination did not constitute a breach of contract on the part of the Stucchi companies because the right to terminate at will was inherent in the nature of the contract, due to the contract’s indefinite duration.”  Distributors wanting to avoid the same fate will want to point to a definite term.

 

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