California Antitrust and Unfair Competition Law Update: Substantive Law

• Publication year: 2019
• Author: By Thomas A. Papageorge

CALIFORNIA ANTITRUST AND UNFAIR COMPETITION LAW UPDATE: SUBSTANTIVE LAW

By Thomas A. Papageorge¹

I. INTRODUCTION

This outline provides a selection of substantive appellate and litigation developments that may be of particular interest to members of the Antitrust, UCL and Privacy Section. These developments include cases brought under the Cartwright Act, the Unfair Practices Act, the Consumers Legal Remedies Act, the Unfair Competition Law and False Advertising Law, as well as related developments regarding covenants not to compete and public enforcement actions.

II. CARTWRIGHT ACT (BUSINESS AND PROFESSIONS CODE § 16720 ET SEQ.)

A. In Two Opinions, District Court Applies the Aspen Skiing Exception to an Aerospace Industry Refusal-to-Deal Case and Finds Tied Product Allegations Sufficient for a Tying Claim to Proceed 1. Packaging Systems, Inc. v. PRC-Desoto International, Inc., et al.² 2. Packaging Systems, Inc. v. PRC-Desoto International, Inc., et al.³

Plaintiff Packaging Systems, an aerospace products firm, alleged Cartwright Act restraints of trade and other state and federal antitrust violations arising from an asserted refusal-to-deal agreement among plaintiff's suppliers and competitors in the aerospace sealant industry. Defendants PRC-Desoto and PPG Industries made an aerospace sealant for commercial and government uses. Plaintiff purchased the sealant from the two defendant companies at wholesale and repackaged it in special injection kits for retail sale to aircraft maintenance companies.

PPG announced that it would cease sales of the sealant to firms repackaging it for resale. Packaging Systems filed suit in the U.S. District Court, Central District, alleging, inter alia, unlawful monopolization and tying arising from defendants' refusal to deal with plaintiff. Defendants responded that Packaging Systems could not properly allege that the defendants had an antitrust duty to deal with Packaging Systems or were unlawfully tying these products.

[Page 1]

(1) In its July 14, 2017 decision, the district court rejected defendants' duty-to-deal analysis. Judge Otis Wright found these circumstances analogous to Aspen Skiing Co. v. Aspen Highland Skiing Corp.,⁴ defendants terminated a profitable relationship with the plaintiff for allegedly anticompetitive reasons. Plaintiff alleged PRC-Desoto and PPG refused to continue to sell the sealant to Packaging Systems even at profitable retail prices without a legitimate business justification, but continued to sell to other non-repackaging resellers. The court found unpersuasive PPG's claims that safety considerations motivated the changed policy.

Judge Wright held the plaintiff's allegations were sufficient to bring the case within the Aspen Skiing exception to the general rule that a monopolist has no duty to deal with its competitors. "Drawing all inferences in Plaintiff's favor, the Court concludes that this case plausibly fits within the Aspen Skiing exception . . . PPG's abrupt decision to end this course of dealing suggests that it was willing to sacrifice short-term profits for the possibility of charging inefficient monopoly prices in the long run."⁵ The court also found sufficient the plaintiff's pleading of unlawful secret rebates in violation of the California Unfair Practices Act.⁶

(2) The district court had also ruled that Packaging Systems did not adequately plead its tying claim under the Cartwright and Sherman Acts, but granted leave to amend. Plaintiff filed an amended complaint with further details defining the alleged tying and tied markets.

On February 6, 2018, Judge Wright ruled on defendants' subsequent motion to dismiss the amended tying claims for inadequate pleading of the relevant product markets and other defects. The court denied the motion, finding Packaging Systems' allegations of the tied market and other aspects of its allegations sufficient. "'Both Section 1 and the Cartwright Act prohibit illegal tying arrangements,' and the elements of § 1 tying claim for the most part mirror that of the Cartwright Act."⁷ Under the "commercial realities" test, the plaintiff's tied product market of "end-user packaging consistent of kits, syringes and [small] cans" is "sufficient for the purposes of defining the relevant product market at the pleading stage."⁸

The court also found adequate allegations of coercion to buy the bundled package of products: "Consumers are forced to buy both the sealant and the kits/syringes/cans from PPG. These allegations are sufficient to plead coercion." Regarding the required pleading of distinct tying and tied products, plaintiff properly alleged "the seller has foreclosed competition on the merits in a product market distinct from the market for the tying item."⁹

[Page 2]

B. Ninth Circuit Concludes a Subsidiary Cannot Claim Intent Different From Its Parent Under the Copperweld Doctrine Arandell Corp. v. Center Point Energy Services, Inc.¹⁰

Providing an important insight into the intracorporate conspiracy analysis of Copperweld Corp. v. Independence Tube Corp.,¹¹ the Ninth Circuit held that a wholly-owned subsidiary in a Section 1 and state antitrust law case cannot claim its actions were for purposes other than those of its parent: "[F]or antitrust purposes, it is legally impossible for firms within a single 'economic unit' to act together in furtherance of the same price-fixing scheme for independent and distinct purposes."¹²

Under this analysis, the subsidiary could not claim that it acted for a legitimate purpose while "disavowing the anticompetitive intent" of its parent.¹³ Thus, there was a triable issue of conspiracy liability under both the Sherman Act and the Wisconsin antitrust statute.¹⁴ (The Ninth Circuit's opinion in Arandell may prove important in cases with disparate parent/subsidiary situations, such as situations where plaintiffs seek to establish antitrust liability in cases involving foreign parent companies and their U.S. subsidiaries.)

Other Cartwright Act and state antitrust law developments:

In re Lipitor Antitrust Litigation.¹⁵ The class action allegation of plaintiff pharmacists that an alleged reverse settlement agreement regarding Lipitor was a per se violation of the Cartwright Act was insufficient to state a cognizable claim under the Act. Since the California Supreme Court¹⁶ concluded that reverse settlement agreements must be judged under the rule of reason rather than the per se rule, the plaintiffs' decision to proceed under a per se theory doomed its Cartwright Act conspiracy claim, which did not adequately allege required elements including the requisite value of the reverse payment.¹⁷

In re Korean Ramen Antitrust Litigation.¹⁸ In a nationwide Cartwright Act class action alleging collusion among California-based ramen makers, District Court Judge William H. Orrick rejected defendants' challenge to certification, holding that California's Cartwright Act was not materially different from other states' laws such that decertification would be required. Previously Judge Orrick had ruled against defendants claims: (1) that the statute of limitations barred plaintiffs' Sherman Act, Cartwright Act, and Unfair Competition Law claims; (2) that principles of international comity required deference to a ruling in defendants' favor by the Korea Fair Trade Commission; and (3) there was inadequate evidence of a price-fixing conspiracy to proceed in a U.S. antitrust forum.

[Page 3]

UFCW & Employers Benefit Trust v. Sutter Health, S.F. Super Ct.¹⁹ State antitrust class actions are less common after CAFA but remain significant for California practitioners. Here, the Superior Court granted plaintiffs' motion to certify a class of self-funded health plans and state agencies in a state antitrust/unfair competition case. Healthcare-benefits trustee UFCW claimed that defendants violated California's Cartwright Act and Unfair Competition Law by illegally increasing hospital pricing and forcing competitors into anticompetitive provider agreements. The Superior Court granted UFCW's motion for class certification, but also foreshadowed the challenges for plaintiffs here, given that the "landscape of this case, with its many services, prices, and discounts" presented a "complex economic picture."²⁰

III. UNFAIR PRACTICES ACT (BUSINESS AND PROFESSIONS CODE § 17000 ET SEQ.)

A. Secret Rebates Allegation Survives Demurrer in Aerospace Sealants Antitrust Case Packaging Systems, Inc. v. PRC-Desoto International, Inc., et al.²¹

In Packaging Systems, discussed further above, District Court Judge Wright also concluded that plaintiff Packaging Systems adequately pleaded that defendant PRC-Desoto International and PPG unlawfully offered secret rebates or discounts to injure competition within the meaning of California's Unfair Practices Act, Business and Professions Code section 17045. While rejecting certain of the claimed secret discounts, the district court found sufficient allegations for plaintiff to go forward on its core UPA theory.

The district court summarized the key competitive injury allegation as follows: "Offering discounts to Plaintiff's competitors and customers not offered to Plaintiff has a tendency to substantially reduce Plaintiff's customer base. Over the long run, this will put Plaintiff out of business. And once PPG loses its biggest competitor in the retail distribution market, PPG will be free . . . to charge supracompetitive prices for sealant to end-users. Plaintiff has therefore demonstrated that PPG's price discrimination has a tendency to harm competition."²²

B. District Court Recognizes Standing for Third-Party Plaintiffs in UPA Actions Arena Restaurant and Lounge LLC v. Southern Glazer's Wine and Spirits, LLC²³

In an Unfair Practices Act action alleging both unlawful loss leaders (Bus. & Prof. Code § 17044) and sales below cost (Bus. & Prof. Code § 17043) in liquor wholesaling, the district court for the Northern District of California concluded that Business and Professions Code section 17070 authorizes...