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Indirect Purchaser Cases in 2017: Key District Court Rulings

Competition Law360
January 8, 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, 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 readily identified and excluded from the EPP class, causing noncommon issues to predominate.[22]

In Lidoderm, the court disagreed that brand loyalists’ presence rendered the class overbroad because the EPPs and their expert created a method for estimating the number of brand loyalists in the class using common evidence.[23] The EPPs’ expert first defined "brand loyalists" as consumers who voluntarily choose to buy the brand after generic entry (excluding those whose health plans required them to continue purchasing the brand after generic entry), then estimated the amount of extant brand loyalists and excluded those purchases from the aggregate damages model.[24] The court concluded that the claims administration process would afford the opportunity to further identify and exclude brand loyalists.[25]

Similarly, in Solodyn, both parties acknowledged brand loyalists’ existence but disputed what percentage of the EPP class they comprised. Unusual to Solodyn (among pay-for-delay cases) was the fact that generics were on the market for a portion of the class period.[26] Thus, defendants argued that actual data from this time period was the appropriate measure of the impact of generics on the market (in the but-for world). Using the actual data, the defendants’ expert found that 70 percent of Solodyn purchasers were brand-loyal and unharmed by alleged delayed entry.[27] The plaintiffs argued that “forecasts of the generic penetration that likely would have occurred with unimpaired generic competition,” and academic literature were superior to determining the drug’s but-for price and in turn, the number of brand loyalists.[28]

The court agreed with plaintiffs, finding that the actual data was not “an appropriate proxy for the but-for market,” and predictive evidence and methodologies served as a better basis for a showing of predominance of class-wide issues.[29] The court also rejected an assumption that undergirded defendants’ estimates of brand loyalists. Defendants’ expert assumed that all purchases of branded Solodyn after generics entered the market were by brand loyalists. But the court recognized that just before generic entry, the manufacturer had released an add-on strength version of Solodyn, allowing the brand manufacturer to “switch a large segment of the market to the brand Add-On Strengths” version.[30] This fact undercut the conversion rate of prescriptions from brand to generics after they entered the market, and was not properly taken into account by defendants’ expert.[31]

Rebates to third-party payor indirect purchasers are no bar to certification.

Unique to the pharmaceutical drug supply chain are the existence of third-party payors (“TPPs”). Generally, TPPs are insurance companies that pay for pharmaceutical products on behalf of their insured consumers.

In Lidoderm, the defendants argued that the EPP class was inclusive of uninjured TPPs because they received rebates “provided by drug manufacturers and secured and paid through [pharmacy benefit managers].”[32] In support, the defendants gave two examples “where named TPPs were not injured because they paid less per patch ‘on average’ for generic than branded Lidoderm.”[33] The court rejected this possibility, first acknowledging that a plaintiff is injured the moment she pays an antitrust overcharge, regardless of whether that is later offset by a rebate.[34] Moreover, the EPPs’ expert had accounted for TPP rebates in estimating overcharges using classwide proof.[35] The expert’s method determined the existence of overcharges on all drug purchases after determining a but-for price of branded and generic Lidoderm and after accounting for rebates on the assumption that pharmacy benefit manages uniformly passed on 100 percent of the rebates to TPPs. The court found the EPPs’ analysis sufficient for purposes of class certification.[36]

Insurance premium “pass-on” argument is rejected.

The Lidoderm defendants also argued that class certification was inappropriate based on health insurance and welfare plan third-party payors’ ability to “recoup overcharge costs through premium adjustments.”[37] The defendants “seem[ed] to recognize” that this defense was unavailable under federal law (because injury is recognized as the overcharge, notwithstanding any later offset), but argued the defense applied under state law because certain TPPs “‘absorbed’ the overcharges” by later bumping up insurance premiums.[38] According to the defendants’ expert, calculating premium adjustments would require individualized investigations to determine the extent of the overcharge absorption.[39]

The court disagreed, however, first questioning the pass-on argument because the end-payor plaintiff class was “by definition” exclusive of any resellers, then finding that there was no evidence that the TPPs’ premiums were calibrated to compensate for past antitrust overcharges. Instead (as even defendants’ expert opined), premiums are meant to cover forward-looking health care and prescription drug costs for their members, not recover or absorb past costs.[40]

Nationwide and Multistate “Repealer” Classes Based on California Antitrust Law

Four district court decisions, one in the class certification context and three at the pleading stage, addressed the propriety of a multistate class asserting claims based on California’s antitrust law, the Cartwright Act. The cases involved branded consumer food products and cellular phone handsets, and had similar outcomes favorable to the indirect purchaser plaintiffs.

Indirect purchaser multistate repealer classes are on solid footing in California federal courts.

In re Korean Ramen Antitrust Litigation involved a motion to certify a nationwide class (or a subset thereof) of indirect purchasers of Korean noodles[41] asserting claims under California’s Cartwright Act. In addressing due process considerations related to the application of one state’s laws to class members in another state, and following Ninth Circuit authority,[42] the district court explained that “all of the Defendants’ conduct within California leading to the sale of price-fixed goods outside the state” must be considered, and held that because “there are more than de minimis allegations of conspiratorial conduct and impact occurring in California,” due process permitted application of California law to nonresidents.[43] On its ensuing choice of law analysis, the court again followed Ninth Circuit authority,[44] and analyzed whether California law conflicted with the laws of other states. While the district court rejected the plaintiffs’ motion to certify a nationwide class of indirect purchasers of Korean noodles, it certified a class of indirect purchasers from “24 Illinois Brick repealer jurisdictions.” The court found that nonrepealer states’ laws conflicted with California law in that such indirect purchaser claims “simply could not go forward” in the nonrepealer states. The district court permitted the inclusion of all repealer states in the proposed class, however, reasoning that the defendants — who had the burden of establishing the conflict — failed to show any.

In re: Packaged Seafood Products Antitrust Litigation similarly addressed indirect purchaser claims on behalf of a nationwide class of consumers of packaged seafood products, primarily tuna, at the pleading stage.[45] The court first addressed, and rejected, the indirect purchaser plaintiffs’ argument that the propriety of a nationwide class should not be addressed until class certification. The court reasoned that “[a]s long as a court has sufficient information to thoroughly analyze the choice-of-law issue, ... it is appropriate for a Court to undertake choice-of-law analysis at the motion to dismiss stage.”[46]

On its conflict of laws analysis, the court held that there was a conflict between the application of California’s Illinois Brick repealer statute, and the laws of states that had not enacted such legislation, that states that had not done so “have strong interests in seeing their particular legislative decisions regarding Illinois Brick honored,” and that those states’ interests would be more impaired by application of California law to transactions (i.e., purchases of consumer goods) in the foreign jurisdiction.[47] On that basis, the court dismissed the nationwide class claims based on California law.

The indirect purchaser plaintiffs then filed an amended complaint, asserting claims on behalf of a multistate class under California antitrust law limited “to states that offer indirect purchasers a private right of action akin to California’s Cartwright Act.”[48] The defendants first attempted to defeat this claim by arguing that variations in states’ statutes of limitations raised conflicts sufficient to defeat the claim. The court rejected this argument, reasoning that defendants failed to show that any state claim would be precluded by limitations arguments. The defendants then argued that the plaintiffs’ class “include[s] states that do not allow indirect purchasers to bring antitrust claims, such as Arkansas, Florida, Massachusetts, Rhode Island, ... South Carolina, ... Illinois, Missouri, and Virginia.” The court addressed these arguments, rejected defendants’ arguments that these states precluded such claims, and found that the “Plaintiffs’ have stated a plausible Cartwright [Act] Class.”[49]

Nationwide Cartwright Act class is viable in monopolization case against California resident defendant.

Finally, in Qualcomm, discussed above, the indirect purchaser plaintiffs alleged nationwide class claims based on violations of the California Cartwright Act. Qualcomm challenged the claims on several bases, all of which were rejected by the court. The court first upheld plaintiffs’ monopoly claims notwithstanding the Cartwright Act’s requirement of “a combination ... acts by two or more persons,” reasoning that a Cartwright Act “combination” may be found where a producer coercively imposes restraints on downstream market participants, and that plaintiffs alleged such conduct by Qualcomm.[50]

On the issue of whether the application of California law comports with due process, the court found Qualcomm’s contacts sufficient: Qualcomm’s principal place of business is in California, Qualcomm made business decisions related to its anti-competitive conduct in California, and Qualcomm negotiated the licenses at issue in California.[51] The burden then shifted to Qualcomm to show that foreign law, not California law, should be applied under the three-step test in Mazza.

The court found that there are material differences between California’s Cartwright Act and the antitrust statutes of certain other states, in that some states would not allow suits for damages by indirect purchasers to proceed at all. But the court found those states “have no legitimate interest in applying their law to this dispute,” reasoning that the foreign states’ “laws are designed to protect businesses and other actors from excessive antitrust liability by limiting suits for damages to those brought by direct purchasers,” and that such interests are not implicated here, where the only defendant is a California resident.[52] The court further reasoned that “applying other states’ laws to bar recovery here would paradoxically disadvantage the other states’ own citizens for injuries caused by a California defendant’s unlawful activities that took place primarily in California.”[53] On these bases, the court denied Qualcomm’s motion to strike plaintiffs’ nationwide class allegations.

Takeaways: Where a defendant’s alleged conduct in California is more than de minimis, indirect purchaser plaintiffs should consider asserting claims under the California Cartwright Act on behalf of a nationwide class, or at the very least, a multistate “repealer” class. Where the only defendant resides in California, the court’s analysis in Qualcomm both as it pertains to alleging monopolization claims under the Cartwright Act, and the propriety of the application of that law to a national class of consumers, provides a strong basis for maintaining a nationwide class.

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 Competition Law 360, Emerging Trends in Indirect Purchaser Cases, by Chris Micheletti and Patrick Clayton, Jan. 19, 2012, available at https://www.law360.com/articles/298578/emerging-trends-in-indirect-purchaser-antitrust-cases.

[3] In re: Qualcomm Antitrust Litig., No. 17-MD-02773-LHK, 2017 WL 5235649, at *11 (N.D. Cal. Nov. 10, 2017).

[4] Id. at *11.

[5] Id. at *11-13.

[6] Id. at *13.

[7] Lorenzo v. Qualcomm Inc., 603 F. Supp. 2d 1291 (S.D. Cal. 2009); Feitelson v. Google Inc., 80 F. Supp. 3d 1019 (N.D. Cal. 2015).

[8] Qualcomm, 2017 WL 5235649, at *15.

[9] 238 F. Supp. 3d 1032 (N.D. Ill. 2017).

[10] Id. at 1037.

[11] Id. [13] Supreme Auto, 238 F. Supp. 3d at 1040-41.

[12] Assoc. Gen. Contractors of Cal. v. Cal. State Council of Carpenters, 459 U.S. 519, 539 (1983), directs federal courts to apply a five-factor test to “evaluate the plaintiff’s harm, the alleged wrongdoing by the defendants, and the relationship between them” to determine whether a plaintiff is a proper party to bring an antitrust claim. These factors are: “(1) the nature of the plaintiff’s alleged injury; that is, whether it was the type the antitrust laws were intended to forestall; (2) the directness of the injury; (3) the speculative measure of the harm; (4) the risk of duplicative recovery; and (5) the complexity in apportioning damages.” Amarel v. Connell, 102 F.3d 1494, 1507 (9th Cir. 1997).

[13] Supreme Auto, 238 F. Supp. 3d at 1040-41.

[14] Id.

[15] F.T.C. v. Actavis, Inc., 133 S.Ct. 2223, 2237 (2013).

[16] In re Lidoderm Antitrust Litig., 103 F. Supp. 3d 1155, 1160 (N.D. Cal. 2015).

[17] Id. [19] Solodyn, 2017 WL 4621777, at *11.

[18] In re Solodyn (Minocycline Hydrochloride) Antitrust Litig., No. 14-md-02503, 2017 WL 4621777, at *1 (D. Mass. Oct. 16, 2017).

[19] Solodyn, 2017 WL 4621777, at *11.

[20] In re Lidoderm Antitrust Litig., No. 14-md-02521-WHO, 2017 WL 679367, at *1 (N.D. Cal. Feb. 21, 2017); Solodyn, 2017 WL 4621777, at *22.

[21] Lidoderm, 2017 WL 679367, at *18; Solodyn, 2017 WL 4621777, at *15.

[22] Id.

[23] Lidoderm, 2017 WL 679367, at *19.

[24] See id.

[25] Id.

[26] Solodyn, 2017 WL 4621777, at *8.

[27] Id. at *15.

[28] Id. at *8-9, 15.

[29] Id. at *8.

[30] Id.

[31] Id. at *15 (internal citation and quotation marks omitted).

[32] Lidoderm, 2017 WL 679367, at *20.

[33] Id. (citation omitted).

[34] Id. at *22.

[35] Id. at *21.

[36] Id.

[37] Id. at *22.

[38] Id.

[39] Id.

[40] Id. at *22-23.

[41] Korean noodles are defined as Nongshim and Ottogi branded bag, cup, or bowl ramen, including fried, dried, fresh and frozen noodle products.

[42] AT & T Mobility LLC v. AU Optronics Corp., 707 F.3d 1106 (9th Cir. 2013).

[43] Korean Ramen, 2017 WL 235052, at *21.

[44] Mazza v. Am. Honda Motor Co., 666 F.3d 581, 590 (9th Cir. 2012).

[45] In re: Packaged Seafood Products Antitrust Litig., 242 F. Supp. 3d 1033, 1066 (S.D. Cal. 2017).

[46] Id. (citations omitted).

[47] Id. at 1067.

[48] In re: Packaged Seafood Products Antitrust Litig., --- F. Supp. 3d ---, Case No.: 15-MD-2670 JLS (MDD), 2017 WL 4271894, at *10 (Sept. 9, 2017 S.D. Cal.).

[49] Id. at *11.

[50] Qualcomm, 2017 WL 5235649, at *17-19.

[51] Id. at *19-21.

[52] Id. at 21.

[53] Id.