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Indirect Purchaser Cases in 2017: Key Appeals Court Rulings
Competition Law360January 5, 2018
By Christopher T. Micheletti and Christina S. Tabacco
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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, 23(b)(3) predominance, and indirect versus direct purchaser status. There also 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 antitrust law, the Cartwright Act, and a variety of other instructive decisions.
In this, the first of a two-part year-end review, we discuss several key decisions of courts of appeal.
Ascertainability Requirements
In 2017, several courts of appeal addressed the “hot-button” class certification issue of “ascertainability” — albeit outside of the antitrust context. Generally, this issue involves the question of whether class “ascertainability” or determination of class membership may be satisfied by a class definition that is based on objective and definite criteria, or whether, in addition to the latter requirement, class plaintiffs must also show that it is “administratively feasible” to identify class members, and what level of proof satisfies that requirement. Given the clear implications for the burdens imposed on indirect purchaser plaintiffs — who frequently allege antitrust injuries arising out of the purchase inexpensive consumer products — several appellate decisions from this past year are discussed below.
Second and Ninth Circuits reject “administratively feasible” ascertainability requirement.
In In re Petrobras Securities and Briseno v. ConAgra Foods Inc., the Second and Ninth Circuits, respectively, declined to append an “administrative feasibility” requirement to Federal Rule of Civil Procedure 23 governing class certification.[2] In Briseno, plaintiffs, consumer purchasers of a ConAgra brand cooking oil, alleged that the product bore false or misleading labels.[3] ConAgra argued that there was no way to reliably identify absent class members “because consumers do not generally save grocery receipts and are unlikely to remember details about individual purchases of a low-cost product like cooking oil.”[4] ConAgra urged the court to require that absent class members be readily identifiable under Rule 23.[5]
The Ninth Circuit decided that a separate administrative feasibility condition is “unnecessary,”[6] because it is incompatible with the language of Rule 23 and because the enumerated Rule 23 requirements adequately address policy concerns that have motivated some circuits to adopt the requirement.[7]
While Briseno was a false advertising case, since that decision, the Northern District of California has followed it in two antitrust indirect purchaser cases, including one that involved consumer purchases of inexpensive food products.[8] Citing Briseno, the district court in In Re Korean Ramen Antitrust Litigation held that even though “consumers do not generally save ‘grocery receipts and are unlikely to remember details about individual purchases of a low-cost product’ ... [n]either the fact that class members have to ‘self-identify’ nor that they might not have readily available proof of purchase, means that they are not ascertainable sufficient for class certification.”[9]
Third Circuit’s “administratively feasible” requirement remains, vexing IP plaintiffs, but its critics within the Circuit grow.
In City Select Auto Sales Inc. v. BMW Bank of North America Inc.,[10] the Third Circuit vacated and remanded a denial of class certification of plaintiffs who allegedly received unsolicited faxes from defendants via defendants’ use of a database of fax numbers in violation of the Telephone Consumer Protection Act. The appellate court held that the database, which bounded the universe of potential class members because the class definition was limited to those identified in the database, in combination with affidavits could be a reliable and administratively feasible way of determining class membership.[11] Though the Third Circuit requires that there be “a reliable and administratively feasible mechanism for determining whether putative class members fall within the class definition,” Judge Julio M. Fuentes wrote a concurring opinion advocating for the rejection of the administrative feasibility requirement.[12] Judge Fuentes cited the “unnecessary burden on low-value consumer class actions,”[13] echoing Judge Marjorie Rendell’s 2015 critique of the Third Circuit rule.[14]
Thus, for the moment, the Third Circuit maintains this additional ascertainability hurdle that, as demonstrated by In re Domestic Drywall Antitrust Litigation discussed below, may continue to trip-up indirect purchaser plaintiffs’ efforts to certify classes.
In Drywall, the district court denied the indirect purchaser plaintiffs’ motion for class certification, finding that, among other things, the class member identification was not administratively feasible.[15] The Drywall plaintiffs alleged that drywall manufacturers illegally agreed to two year-long price hikes and other changes in pricing practices in violation of federal and state antitrust laws.[16] The indirect purchaser plaintiff class was comprised of end-users: “‘Do-it-yourself’ purchasers (those who buy and install drywall themselves) and ‘Do-it-for-me’ purchasers of drywall (those who pay for drywall as part of a home remodeling contract).” The proposed class included home and business owners and tenants of residential or commercial properties who purchased and installed drywall during the previous five years.[17]
The court held that the indirect purchaser plaintiffs failed to meet the “implied” 23(b)(3) requirement of administrative feasibility.[18] Recognizing that the proposed indirect purchaser plaintiff class “probably includes millions of plaintiffs,” the court agreed with defendants that there was no manageable way to notify and identify the differently situated drywall purchasers or verify their purchases.[19]
The indirect purchaser plaintiffs offered to substantiate purchases with transactional data produced in the litigation (though admittedly limited); class members’ own purchase records; and as a last resort, photographs of the purchased and installed drywall branded with the manufacturer’s name that would require plaintiffs to demolish some of their home or business in order to expose the drywall.[20] The defendants argued that these proffers lacked reliability, and that deposition testimony had already shown that some plaintiffs could not recall from which manufacturer they purchased drywall.[21]
The court found that the proposed transactional data and photographs lacked information necessary to correctly identify end-user purchases.[22] For example, a photograph would not aid determination as to whether drywall was purchased as part of a completed home or building or was purchased as a standalone product.[23] The court also doubted that class members would have retained records for the six years at issue in the case.[24] Finally, the court found the class not ascertainable because indirect purchaser plaintiffs’ proposed class definition extended to purchases “to the present time,” creating management problems because the case did not involve “continuing violation” conduct and was thereby fatally open-ended.[25]
Takeaway: While the Supreme Court denied certiorari in Briseno, and the Second, Sixth, Seventh, Ninth and Eighth Circuits have declined to adopt an administrative feasibility requirement,[26] the latter requirement remains in place in the Third Circuit. As such, indirect purchaser plaintiffs whose class members purchased inexpensive consumer products, products that are relatively difficult to trace through the chain of distribution, or component products that are relatively difficult to identify in finished goods, should carefully consider how each circuit’s ascertainability standards will affect their chances of obtaining class certification.
Rule 23(b)(3) Predominance
At Third Circuit, “highly customized” products at issue and data inadequacies in impact and pass-through studies defeat 23(b)(3) predominance.
In re Class 8 Transmission Indirect Purchaser Antitrust Litigation involved claims by indirect purchaser plaintiffs who purchased Class 8 heavy-duty truck transmissions. Defendants were four manufacturers of Class 8 trucks and Eaton Corporation, the primary supplier of Class 8 transmissions. Alleging violations of antitrust and unfair competition laws in 21 states, the plaintiffs claimed that the truck manufacturers had long-term agreements with Eaton that provided the truck manufacturers with lucrative loyalty rebates from Eaton if they purchased a certain percentage — over 90 percent — of Eaton transmissions for their Class 8 manufacturing needs. Plaintiffs asserted that these agreements were part of a conspiracy that foreclosed a transmissions manufacturer competitor from entering the Class 8 performance transmissions market, and that they paid supracompetitive prices for Class 8 trucks and therefore the transmissions.
On class certification, the district court concluded that the indirect purchaser plaintiffs failed to meet the “Rule 23(b)(3) predominance requirement that common evidence could prove that all or nearly all of the proposed class members (i.e., indirect purchasers) paid a higher price than they would have absent the alleged conspiracy.”[27]
The plaintiffs asserted that the district court erred by relying on claimed market complexities such as the “unique and highly customized” Class 8 trucks at issue, the “complex distribution chain,” and “unique sales incentives” that may not be reflected on invoice pricing, arguing that such conditions would be present in the “but for” world as well. The court of appeal rejected this argument, reasoning that a “qualitative assessment” of common market traits versus “individual factors in the real-world market” was permissible.[28]
The district court also found that the plaintiffs’ expert’s analysis did not test class-wide impact because it: (1) was based solely on a portion of linehaul transmission sales data, excluding performance transmission sales, which comprised nearly half of Eaton’s transmissions sold during the relevant time period; and (2) excluded data from two truck manufacturers, whose sales comprised over forty percent of the linehaul trucks. The court of appeal upheld the district court’s ruling, reasoning that it was not an abuse of discretion to consider whether the available data met burden of proof, and that pass-through studies that accounted for about 2 percent of all transactions at issue were insufficient to demonstrate class wide impact.
Takeaways: For defendants, qualitative evidence that the products at issue are highly customized and that the market is complex can help support a denial of class certification in the trial court and on appeal. For plaintiffs, it is very important to pursue and obtain sufficient transactional data to address both overcharge and pass-through. Quantitative studies that fail to consider broad categories of upstream direct sales from the defendants to direct purchasers, or that consider only a small fraction of downstream sales from direct purchasers to end purchasers, may not carry the day under a rigorous analysis.
Indirect v. Direct Purchaser Status
Ninth Circuit explains indirect versus direct purchaser status in Apple iPhone Antitrust Litigation
Here,[29] the Ninth Circuit was asked whether a consumer class of Apple iPhone purchasers were direct or indirect purchasers for purposes of standing under Illinois Brick.[30] The plaintiffs, consumers who bought iPhones and iPhone applications, alleged that Apple Inc. monopolized the market for apps because of its control over and use of the process by which the apps were sold. The apps, created by third-party app developers, were sold from Apple’s App Store exclusively, as Apple required. App developers set the price for their apps and were required to give Apple a 30 percent cut of the price.[31]
Apple argued that it did not sell apps, but rather “software distribution services to developers.”[32] Apple compared itself to the owner of a shopping mall, leasing physical space to retail stores, the app developers.[33] Rejecting this argument, the court found that the developers did not have their own “stores,” because “part of the anti-competitive behavior alleged by Plaintiffs is that, far from allowing iPhone app developers to sell through their own ‘stores,’ Apple specifically forbids them to do so, instead requiring them to sell iPhone apps only through Apple’s App Store.”[34]
Focusing on the “fundamental distinction between a manufacturer or producer ... and a distributor,” the court found that Apple was a distributor because it sold apps directly to purchasers through its App Store due to “the function Apple serves rather than the manner in which it receives compensation for performing that function.”[35] The court stated that its holding did not rest on “the fact that Plaintiffs pay the App Store, which then forwards the payment to the app developers, less Apple's thirty percent commission,” noting that “[w]hether a purchase is direct or indirect does not turn on the formalities of payment or bookkeeping arrangements.”[36] The court also rejected analysis based on “the form of the payment Apple receives in return for distributing iPhone apps,” reasoning that “Apple does not take ownership of the apps and then sell them to buyers after adding a markup of thirty percent.”[37]
The Ninth Circuit’s decision acknowledged its disagreement with a decision of the Eighth Circuit involving “a transaction closely resembling the transaction” before it, and considering the same direct versus indirect question,[38] thus setting the stage for a possible Supreme Court showdown. Currently, Apple’s petition for writ of certiorari is pending.[39] On Oct. 10, 2017, the court invited the solicitor general to file a brief on behalf of the United States.[40]
Takeaways: The Apple iPhone decision has significant implications for consumer plaintiffs’ status as direct or indirect purchasers, especially for technology-driven supply chains that deviate from or blur roles in traditional supply chain hierarchies. That status in turn implicates, among other things, the plaintiffs’ antitrust injury and standing, as well as the ability to assert a nationwide class based on violations of the Sherman Act. Consumer plaintiffs in cases involving claims of anti-competitive conduct in the distribution of goods or services in e-commerce and other markets, therefore, should assess this decision’s impact on their status and claims, and watch closely the petition for certiorari and any ensuing outcome.
Chris Micheletti is a partner in the San Francisco office of Zelle LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] See Competition Law 360, 2016 Highlights From Indirect Purchaser Class Actions, Chris Micheletti and Christina Tabacco, Dec. 23, 2016, available at https://www.law360.com/articles/875151/2016-highlights-from-indirect-purchaser-class-actions
[2] See In re Petrobras Sec., 862 F.3d 250, 264 (2d Cir. 2017) petition for cert. filed (Nov. 1, 2017), Joint Emergency Motion to Defer Consideration of Petition for a Writ of Cert. filed (Jan. 3, 2017) (seeking to delay review of the certiorari petition and ultimately resolve the case pursuant to the parties’ pending settlement agreement); Briseno v. ConAgra Foods, Inc., 844 F.3d 1121 (9th Cir. 2017), cert. denied, ConAgra Brands, Inc. v. Briseno, 138 S. Ct. 313 (2017).
[3] Id. at 1123.
[4] Id. at 1125.
[5] Id. at 1124-25.
[6] Id. at 1127.
[7] See id. at 1125-32 (listing policy concerns as the burden of class administration, protection of absent class members, dilution of legitimate claims due to the filing of illegitimate ones, and due process rights of the defendant).
[8] See In re Korean Ramen Antitrust Litig., No. 13-CV-04115-WHO, 2017 WL 235052, at *21 (N.D. Cal. Jan. 19, 2017) (ramen noodle products); In re Lidoderm Antitrust Litig., No. 14-MD-02521-WHO, 2017 WL 679367, at *25 (N.D. Cal. Feb. 21, 2017) (prescription pain relief patches).
[9] See In re Korean Ramen Antitrust Litig., 2017 WL 235052, at *21 (citing cases).
[10] 867 F.3d 434 (3d Cir. 2017) (“City Select”).
[11] Id. at 441-43.
[12] Id. at 443 (Fuentes, J., concurring).
[13] Id.
[14] See Byrd v. Aaron's Inc., 784 F.3d 154, 172 (3d Cir. 2015) (Rendell, J., concurring).
[15] In re: Domestic Drywall Antitrust Litig., No. 13-MD-2437, 2017 WL 3700999, at *1 (E.D. Pa. Aug. 24, 2017).
[16] Id.
[17] Id. at *9.
[18] Id. at *5.
[19] Id. at *5-6, *9.
[20] Id. at *9.
[21] Id. at *5.
[22] Id. at *9-10.
[23] Id. at *10.
[24] Id. at *9.
[25] Id. at *10.
[26] See Sandusky Wellness Ctr., LLC v. Medtox Sci., Inc., 821 F.3d 992, 995–96 (8th Cir. 2016); Mullins v. Direct Digital, LLC, 795 F.3d 654, 658 (7th Cir. 2015), cert. denied, 136 S. Ct. 1161 (2016); In re Petrobras Sec., 862 F.3d 250 (2d Cir. 2017), petition for cert. filed (Nov. 1, 2017); Rikos v. Procter & Gamble Co., 799 F.3d 497, 525 (6th Cir. 2015), cert. denied, 136 S. Ct. 1493 (Mar. 28, 2016); but see Sandusky Wellness Ctr., LLC v. ASD Specialty Healthcare, Inc., 863 F.3d 460, 471 (6th Cir. 2017), petition for cert. filed (Nov. 30, 2017) (denying class certification because there was no easy way to determine who was a class member).
[27] 679 Fed. Appx. 135, 138 (3d Cir. 2017).
[28] Id. at 140.
[29] In re Apple iPhone Antitrust Litig., 846 F.3d 313 (9th Cir. 2017), petition for cert. filed (Aug. 2, 2017).
[30] Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977).
[31] Apple iPhone, 846 F.3d at 315-16.
[32] Id. at 323 (citation and quotation marks omitted).
[33] Id.
[34] Id. at 324.
[35] Id.
[36] Id.
[37] Id.
[38] See id. at 323 (discussing Campos v. Ticketmaster Corp., 140 F.3d 1166 (8th Cir. 1998)).
[39] See Petition for Writ of Certiorari, Apple Inc. v. Robert Pepper, et al., No. 17-204 at i (Aug. 2, 2017).
[40] See Order List (583 U.S.) at 3 (Oct. 10, 2017).
