Competition Law360
January 8, 2018
As we enter the new year, we review some of the more interesting 2017 court decisions in or affecting the indirect purchaser class action arena and provide practitioners with some key takeaways for 2018 and beyond. As with 2016,[1] there were no major U.S. Supreme Court decisions impacting indirect purchaser claims. Unlike 2016, however, several courts of appeal decisions addressed key issues such as ascertainability, indirect versus direct purchaser status, and 23(b)(3) predominance. Additionally, there were numerous district court decisions addressing pleading motions, class certification in “pay-for-delay” drug cases, class certification of nationwide and multistate class claims based on California’s state antitrust law, the Cartwright Act, and a variety of other instructive decisions.
In this, the second and final part of this year-end review, we discuss several key district court decisions. (The first part covered appeals court rulings.)
Antitrust Injury and Associated General Contractors
Since the enactment of the Class Action Fairness Act, 28 U.S.C. §1332(d), federal district courts handling indirect purchaser antitrust cases have frequently addressed defendants’ arguments that indirect purchaser plaintiffs asserting antitrust claims under federal and state law lack antitrust standing.[2] These arguments assert, for example, that indirect purchasers’ antitrust injuries are too remote from the defendants’ unlawful conduct, or are not the type of injury the antitrust laws were intended to prevent. We discuss two contrasting 2017 district court decisions here.
Royalty payments for use of component part at issue, when tied to finished product wholesale price, supports antitrust injury.
In In re Qualcomm Antitrust Litigation, the plaintiffs were indirect purchasers of baseband processors, or “modem chips” used in cellphone handsets, and alleged that Qualcomm’s monopoly in that market violated California antitrust law and injured them by raising the prices paid for handset products containing modem chips. Qualcomm moved to dismiss, arguing that plaintiffs’ injuries were not incurred “in the market where competition is being restrained,” and were too remote to confer statutory standing to sue for antitrust violations.[3] Without deciding whether the “market participant” requirement applied to plaintiffs’ claims under California law, the court rejected this argument on the grounds that plaintiffs plausibly alleged that “the artificially inflated price of handsets is inextricably intertwined with the injury that Qualcomm sought to inflict.”[4]
The indirect purchaser plaintiffs’ plausible allegations included Qualcomm’s use of (1) its market dominance in the chip market to extract anti-competitive licensing terms; (2) royalty rates based on the price of the entire handset, not the chip; and (3) royalties that directly raised both chip and total handset prices.[5] The plaintiffs further alleged that the cost of modem chips substantially influenced the retail price that manufacturers, retailers, and distributors charge for a handset; that modem chips have no “independent free-standing use” apart from handset use; and that consumers drive demand in the chip market.[6]
Qualcomm also argued that two analogous cases supported dismissal.[7] The court rejected these arguments, finding plaintiffs’ allegations far more detailed. The court specifically noted plaintiffs’ allegation that Qualcomm’s royalty base is the wholesale price of the entire handset, not the modem chip, reinforcing that Qualcomm’s conduct targets the end-product market — handsets as a whole — rather than merely the handset’s components.[8]
Use of defendants’ steel products in a “panoply” of “mixed material” consumer products from appliances to construction equipment resists showing of antitrust injury.
A contrasting 2017 decision is presented in Supreme Auto Transport LLC v. Arcelor Mittal,[9] in which the plaintiffs were indirect purchasers of steel used in “a panoply of consumer products containing steel, including refrigerators, dishwashers, ovens, automobiles, air conditioner units, lawn mowers, and farm and construction equipment.”[10] The indirect purchaser plaintiffs asserted violations of state antitrust laws, alleging that the defendant U.S. steel producers orchestrated a concerted cutback in steel production, resulting in domestic demand for steel that was well in excess of defendants’ production, a shortage of steel on the U.S. market, and substantially higher steel prices.[11] On the issue of whether plaintiffs plausibly alleged antitrust injury, and applying the federal standard set forth in Associated General Contractors[12] (“AGC”) to plaintiffs’ state law claims, the court found for defendants and dismissed the case.
While the plaintiffs’ complaint contained allegations addressing the AGC standards, the court found them to be insufficiently detailed, given the product market at issue — namely, upstream raw steel that was incorporated into “mixed material products” ranging from construction equipment to appliances.[13] The court faulted plaintiffs’ complaint allegations for, among other things, failing to address the role of intermediaries in the chain of distribution, the link between specific products and individual steel mills, and whether or how steel in a given end-product can then be traced to a defendant’s mill.[14]
Takeaways: These contrasting decisions reinforce that indirect purchaser plaintiffs alleging antitrust violations involving component products should, if possible, include certain key allegations to support antitrust injury. Such allegations include, for example, that:
- the component products have no independent utility and have value only as components for the specific products at issue;
- the market for the components and the market for the products in which the components are used are directly linked such that the demand for the components derives from the demand for the end products;
- the component parts can be physically traced through the supply chain; and,
- component part prices can be traced to show that changes in the prices paid by direct purchasers of the components affect prices paid by indirect purchasers of products containing the components.
If the plausibility of these allegations is not clear from the basic case facts, defendants should challenge any perceived lack of detail, and notwithstanding the pleading stage of the case, plaintiffs should strive to provide more facts and economic analyses like that presented in Qualcomm.
Class Certification — Pay-for-Delay Cases
In 2013, the U.S. Supreme Court decided Federal Trade Commission v. Actavis PLC, holding that “large and unjustified” reverse payment settlements resulting from Hatch-Waxman “paragraph IV” litigation are subject to antitrust scrutiny.[15] Generally, reverse payment cases arise when a branded drug manufacturer and holder of patent(s) protecting the drug’s pharmaceutical formulation sues a generic competitor for patent infringement, and then pays the alleged infringer a substantial settlement in return for the competitor’s agreement to delay or refrain from entering the market for the branded drug. Indirect purchaser plaintiffs such as consumers and insurers as “third-party payors” are frequently in pay-for-delay cases.
Indirect purchaser plaintiffs, or end-payor plaintiffs (“EPPs”) as they are called in pay-for-delay and other contexts, face challenges at class certification due to the plaintiffs’ different positions in the chain of distribution, complex class definitions, and damage calculations. Two such cases offer insights on how practitioners might approach these EPP class certification issues.
In re Lidoderm Antitrust Litigation involves antitrust allegations stemming from the drug manufacturers' reverse payment settlement that ended a patent infringement lawsuit concerning the drug Lidoderm, a pain-relieving patch.[16] The reverse payment consisted of providing the rival generic manufacturer with a supply of brand-name drugs to sell and a period of exclusivity to market a generic version of the drug without competition from other companies.[17]
In re Solodyn (Minocycline Hydrochloride) Antitrust Litigation revolves around claims that the brand-name drug manufacturer and its generic rivals executed a scheme to delay generic competition for Solodyn, a tablet that treats inflammatory lesions resulting from acne.[18] The alleged anti-competitive acts included using an invalid and unenforceable patent to block generic rivals from entering the market, reverse payment settlements with would-be competitors, and using product-switching techniques to prevent lower-cost options from coming to market.[19]
In both cases, EPPs prevailed on class certification motions under Federal Rule of Civil Procedure 23(b)(3).[20]
“Brand loyalists” are no bar to classwide proof.
In Lidoderm and Solodyn, the plaintiffs found a way to exclude uninjured EPP class members using classwide proof and by developing a damages model that accounted for their presence. The defendants and EPPs agreed that “brand loyalists,” consumers who continue to purchase the brand-name version even after cheaper, generic versions enter the market, exist.[21] However, the defendants argued that brand loyalists could not be...
