Richard A. Samp retired on December 31, 2019 after a three-decade career as Washington Legal Foundation’s Chief Counsel. He was counsel of record on WLF’s amicus brief in Comcast Corp. v. NAAAOM.
The U.S. Supreme Court this week unanimously slapped down the Ninth Circuit’s effort to loosen the burden-of-proof standard that plaintiffs’ lawyers must meet in certain discrimination cases. The Court held in Comcast Corp. v. NAAAOM that to prevail on a claim under the Civil Rights Act of 1866 alleging race-based refusal to enter into a contract, a plaintiff must demonstrate that racial discrimination was the but-for cause of the refusal. The Court noted that “but-for” has been the traditional causation standard for tort claims and that there is no evidence Congress intended a different standard for this civil rights statute.
The decision was consistent with those of every other appeals court to address the issue and was a victory for the Washington Legal Foundation, which filed an amicus curiae brief urging reversal of the Ninth Circuit’s decision. But Comcast and other businesses remain vulnerable to the massive costs of defending against this and similarly insubstantial tort claims. The Court remanded the case to the Ninth Circuit for reconsideration under the proper causation standard. If history is any guide, the Ninth Circuit may well conclude on remand that the plaintiffs’ complaint is adequate to survive a motion to dismiss even when considered under the but-for causation standard—thereby exposing Comcast to intrusive and costly discovery requests. It is time for the Ninth Circuit and other lower federal courts to take seriously their obligation to reduce unwarranted litigation costs. Courts must weed out insubstantial claims at the pleadings stage and dismissing complaints that fail to allege facts demonstrating the plaintiff’s right to recover.
A Cable-TV Contract Dispute
Comcast arises from a contract dispute between comedian-turned-Hollywood-mogul Byron Allen and Comcast Corp. Allen’s media empire includes ownership of ESN, which operates seven cable networks that are available in a limited number of U.S. media markets. Over the past decade, Comcast has declined ESN’s requests that Comcast carry the networks, citing low consumer demand for ESN’s programming. Other cable operators declined similar requests from ESN for similar reasons.
In response to the refusals to carry its programming, ESN sued Comcast as well as Charter Communications, Time Warner Cable, DirecTV, and AT&T. The suits alleged that the defendants violated the Civil Rights Act of 1866 (known as “Section 1981”), which prohibits racial discrimination in making and enforcing contracts. Several of the defendants settled the claims by agreeing to carry ESN programming, but Comcast chose to fight.
There is no direct evidence of racial discrimination here. But Allen alleges that Comcast offered carriage contracts to white-owned networks that had fewer viewers than ESN’s networks; he asserts that racial discrimination can be inferred from that allegedly disparate treatment. Comcast denies that it treated white-owned businesses more favorably and notes that its cable offerings include many minority-owned networks.
The Ninth Circuit’s Lenient Causation Standard
The Ninth Circuit held that Allen’s disparate-treatment allegations were sufficient to withstand Comcast’s motion to dismiss. It held that a plaintiff could establish a Section 1981 claim by alleging (and eventually proving at trial) that race was merely “a factor” in a contracting decision. The plaintiff need not demonstrate but-for causation—i.e., it need not show that the defendant would likely have entered into a contract had the plaintiff been white. Based on its lenient “a factor” standard, the Ninth Circuit overturned the decision of the district court, which on three occasions had dismissed Allen’s complaint as inadequate to state a cause of action.
The Supreme Court Unanimously Reverses
In an opinion authored by Justice Neil Gorsuch and issued March 23, the Supreme Court unanimously rejected the Ninth Circuit’s lenient causation standard. It noted the “usual rule” under the common law that tort plaintiffs must prove but-for causation, and held that causation standard applicable throughout a lawsuit—i.e., at the pleadings stage as well as at trial. The Court established a “default rule” that Congress intends to require but-for causation for every federal-law tort claim and found no evidence that Congress intended a different standard when it adopted Section 1981.
Congress has, in fact, expressly adopted a more lenient causation standard for employment discrimination claims filed under Title VII of the Civil Rights Act of 1964. But the Court noted that when Congress amended Title VII in 1991 to adopt its new causation standard, it did not apply the new standard to Section 1981—even though the 1991 statute made other changes to Section 1981.
The Court reversed and remanded the case to the Ninth Circuit. The appeals court will have the opportunity to decide whether Allen’s complaint adequately alleges but-for causation. Unless Allen can allege facts sufficient to show that Comcast likely would have offered to carry the ESN networks had Allen been white, his complaint will be subject to dismissal.
Potential for More Mischief
The facts alleged to date by Allen—principally, his claim that the ESN networks were at least as “worthy” of carriage contracts as some of the white-owned companies with which Comcast does business—are far short of what is required to show that racial discrimination was the but-for cause of the carriage-contract denial. While racial discrimination is a possible reason for Comcast’s decision, it is at least as plausible (based on the facts alleged) that Comcast declined to offer a contract because it genuinely believed that ESN viewer support was insufficient to justify carriage. The Supreme Court has repeatedly held (see, e.g., Ashcroft v. Iqbal) that when (as here) a complaint alleges facts that admit of an “obvious alternative explanation” for the defendant’s conduct, the complaint should be dismissed as implausible in the absence of factual allegations from which one can reasonably infer that the plaintiff’s explanation is more probable.
The problem for corporate defendants facing tort claims is that the Ninth Circuit and some other lower federal courts have displayed a marked unwillingness to adhere to Iqbal. They permit insubstantial claim to proceed past the pleadings even in the absence of factual allegations that render the plaintiff’s discrimination claims more probable than the defendant’s alternative, innocent explanation. Given the Ninth Circuit’s past conduct—including its creation of a new, more lenient causation standard in order to breathe life into Allen’s discrimination claims—there is every reason to fear that it will once again reverse the district court’s dismissal order.
Permitting insubstantial claims to proceed past the pleadings stage undermines the fairness of our judicial system. Once a plaintiff survives a motion to dismiss on the pleadings, the high cost of litigation (including the cost of responding to endless depositions and document requests) will virtually force the defendant to settle the lawsuit without regard to its merits.
That may be what Allen is counting on. But Congress adopted the civil rights laws to eliminate racial discrimination in the making and enforcement of contracts, not as a litigation tool that unhappy plaintiffs can use to browbeat others into making unwanted deals. The Supreme Court took a step in the right direction this week when it held that civil rights plaintiffs are not exempt from the but-for causation requirement applicable to all other tort claims. But it should be vigilant to ensure that lower courts do not water down the but-for causation requirement by authorizing discrimination lawsuits to proceed through discovery when unsupported by factual allegations rendering those claims plausible.
“The reflexive use of RICO by civil litigants in garden-variety consumer disputes does violence to the law’s purpose and unduly burdens our civil justice system.”
—Cory Andrews, WLF Vice President of Litigation
Click here for WLF brief.
WASHINGTON, DC—Washington Legal Foundation (WLF) today asked the U.S. Supreme Court to review, and ultimately to overturn, a decision by the U.S. Court of Appeals for the Ninth Circuit that opens the door to abusive civil suits under the Racketeer Influenced and Corrupt Organizations Act (RICO). In its amicus brief in Takeda Pharmaceutical Co. v. Painters & Allied Trades District Council 82 Health Care Fund, WLF argues that the Ninth Circuit’s decision allowing the suit to proceed contravenes Supreme Court precedent by “virtually eliminating the case-or-controversy and proximate-cause requirements as meaningful checks on spurious RICO claims.”
The case arises from a civil-RICO suit by a third-party payer and others to recover treble their prescription costs for Actos, an FDA-approved diabetes drug. The plaintiffs do not allege any personal injury from Actos; nor do they claim that Actos failed to satisfactorily treat diabetes. Instead they contend that, due to Takeda’s alleged fraud, the FDA failed for a time to warn doctors of an increased risk of bladder cancer for certain Actos users. Had the true facts been known sooner, the plaintiffs claim, doctors would have written fewer Actos prescriptions and the plaintiffs would have incurred fewer costs for Actos.
In its brief urging certiorari, WLF argues that the plaintiffs cannot satisfy RICO’s proximate-cause element because they lack a direct relationship with the defendants. Any costs incurred by the plaintiffs, WLF contends, hinged on the intervening actions of doctors and pharmacy benefit managers. WLF’s brief also argues that the plaintiffs fail to allege a legally cognizable injury in fact under Article III. The individual plaintiffs, for example, admit to taking Actos as prescribed, receiving the bargained-for benefit, and suffering no ill effects. They lack the kind of real-world injury needed to have standing to sue. WLF goes on to explain why a civil-RICO action in which a plaintiff need not show actual harm or proximate cause would be a calamity.
Celebrating its 43rd year, WLF is America’s premier public-interest law firm and policy center advocating for free-market principles, limited government, individual liberty, and the rule of law.
The post WLF Asks High Court to Rein in Abusive Civil-RICO Suits appeared first on Washington Legal Foundation.
“The trial court correctly upheld the defendant’s right to transact—and not transact—with whomever it pleases. The plaintiff is not a victim of monopolistic abuse, but a sore loser in the market.”
—Corbin K. Barthold, WLF Senior Litigation Counsel
Click here for WLF’s brief
(Washington, DC)—Washington Legal Foundation today filed an amicus curiae brief urging the Seventh Circuit to rehear en banc an important antitrust refusal-to-deal case.
Although most television advertising time belongs to television networks, cable companies receive two or three minutes an hour. The cable companies sell most of this ad time in regional clearing houses called “interconnects.” Viamedia acts as a broker for advertisers seeking to buy the cable companies’ ad time. For about ten years, it had an agreement with Comcast that enabled it to access certain Comcast-run interconnects. When that agreement expired, however, the two firms failed to agree to new terms.
Viamedia sued Comcast, alleging, among other things, that it unlawfully refused to deal. The district court dismissed that claim. It concluded that Comcast had a valid business reason for cutting ties with Viamedia: Comcast legitimately sought to create efficiency by cutting out the middleman and moving into the “ad rep” market itself. Viamedia appealed, and a panel of the Seventh Circuit reversed.
WLF’s brief discusses two ways in which the panel went astray. First, the panel misapplied Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985). Properly understood, that decision enables a defendant to win dismissal of a refusal-to-deal claim by invoking a legitimate procompetitive reason for its conduct. Comcast did that here, citing the well-established procompetitive benefits of vertical integration. Second, the panel ignored Schor v. Abbott Laboratories, 457 F.3d 608 (7th Cir. 2006), which makes clear that Comcast had no reason to vertically integrate into a market as an anticompetitive predator, and every reason to step forth as a procompetitive low-cost producer.
Celebrating its 43rd year as America’s premier public-interest law firm and policy center, WLF advocates for free-market principles, limited government, individual liberty, and the rule of law.
The post WLF Urges Seventh Circuit to Rehear Important Antitrust Refusal-to-Deal Case appeared first on Washington Legal Foundation.
In its 1990s TV and radio ads, personal-injury law firm Saiontz & Kirk, PA coined the catchy (and trademarked) phrase “if you have a phone, you have a lawyer.” For today’s plaintiffs’ lawyers, even those quarantined by COVID-19, an updated catch phrase might be “if I have a computer and wi-fi, you have a lawyer.” If two recently filed lawsuits against a hand-sanitizer maker are any indication, the public-health crisis won’t arrest the pace of consumer-fraud class-action filings.
In that regard, we share an encouraging development from a federal district court in New York. On March 16, Eastern District of New York Judge Carol Bagley Amon dismissed (with prejudice) a multi-count, nationwide class action against nutrition-bar maker ONE Brands (Melendez v. ONE Brands, LLC).
The lawsuit charges that the phrase “1 g sugar” on the front of ONE Brands bars is false, misleading consumers into thinking the bars have fewer calories and carbohydrates than they do. The complaint asserts that the “1 g sugar” statement is false because an “independent” test determined the bars contain 5.2 grams of sugar. The plaintiffs also argue that the company’s name is itself misleading because ONE Brands echoes the one gram of sugar touted on the package. The plaintiffs claim an economic injury (they paid more than the bars were worth) and allege violations of New York’s consumer-protection statute and several common-law duties.
The Court’s Reasoning
The court first pared down the nationwide class to one consisting of New York residents only, finding that the unnamed plaintiffs from the 49 other states lacked standing to sue. It then turned to whether federal law preempts the allegations that “1 g sugar” is false and that the brand name is false or misleading.
False Labeling Theory
ONE Brands argued that because the plaintiffs’ nutritional testing did not follow the method prescribed in FDA regulations, the false-labeling claim was preempted. The plaintiffs responded that, at the motion-to-dismiss stage, they need not establish compliance with FDA’s testing method.
With no controlling caselaw in the Second Circuit, the court looked to out-of-circuit cases which, surprisingly, reflected a split of authority. Even the Food Court (the Northern District of California) has issued dueling decisions on the issue. Here, Judge Amon sided with the courts that found preemption if a plaintiff failed to show at the pleading stage that it followed FDA testing procedure. Non-compliant tests, she reasoned, could lead to regulatory controls in conflict with federal law.
False/Misleading Brand Name
The plaintiffs argued that the company, in calling itself ONE Brands, implies nutrient content without FDA approval. The court disagreed. In tying the “one” in its brand name to the one gram of sugar in its bars, it explained, ONE Brands makes “an expressed nutrient-content statement, not an implied one” (emphasis added). And because FDA does not regulate express nutrient-content statements, the court concluded, the plaintiffs could not impose one through state consumer-protection law.
Misleading Front-Label Statement
To determine whether the “1 g sugar” information unlawfully misled buyers into thinking the bars had fewer carbs and calories, the court applied the reasonable-consumer test. Precedents in the Second Circuit dictate that a reasonable consumer who finds a front-label statement ambiguous would look to the mandatory Nutrition Facts for clarification. If the Nutrition Facts objectively clarify the consumer’s confusion, then plaintiffs cannot plead a violation of New York law.
Melendez didn’t have the law on his side in the Eastern District of New York. In similar lawsuits in other jurisdictions, if an “independent lab” dissects a food product to establish a false-labeling claim, some plaintiffs have withstood a motion-to-dismiss on preemption grounds—even if their testing didn’t follow FDA methods. And other district courts, especially those in the Ninth Circuit, would have refused to find as a matter of law that the plaintiff’s confusion was unreasonable. Ninth Circuit caselaw also rejects companies’ “look-at-the-nutrition-label” defense when plaintiffs allege misleading front-label statements. Judge Amon chose wisely when refusing to follow those courts’ reasoning.
We also applaud Judge Amon’s decision to dismiss Melendez’s complaint with prejudice. We’ve criticized other judges’ patience with plaintiffs’ lawyers who allege the bare minimum, knowing that they’ll get two or three more chances. That is a strategy that often keeps defendants on the hook for legal fees and increases settlement pressure.
Even in amidst the coronavirus pandemic, consumer-product makers will no doubt continue to face mislabeling class actions. After all, suing is what class-action lawyers do for a living. And no doubt, those lawyers will perceive that scared Americans’ stockpiling trips to grocery stores are filling food makers’ bank accounts with billions in profits. That perception will elevate food companies, above businesses in other struggling industries, as a prime deep-pocket target for litigation shakedowns. That’s why we’ll need more decisions like Melendez and more judges like Judge Amon willing to shut the courtroom doors, early in the process, to claims that lack merit.
Also published by Forbes.com on WLF’s contributor page.
The post Another Sugar-Coated Food-Labeling Class Action Brushed Away appeared first on Washington Legal Foundation.
Stephen M. Bainbridge is William D. Warren Distinguished Professor of Law, UCLA School of Law and serves as the WLF Legal Pulse’s Featured Expert Contributor, Corporate Governance/Securities Law.
In Salzberg v. Sciabacucchi, (Del. Mar. 18, 2020), the Delaware Supreme validated forum selection clauses in the certificates of incorporation of Blue Apron Holdings, Inc., Stitch Fix, Inc., and Roku, Inc., all of which required that claims against the companies brought under the Securities Act of 1933 be brought in federal courts. In 2015, the Delaware legislature had added § 115 to the Delaware General Corporation Law (DGCL) to validate forum selection clauses that “require … that any or all internal corporate claims shall be brought solely and exclusively in any or all of the courts in this State.” Although § 115 on its face neither validated nor banned federal forum selection clauses, many corporations have adopted such clauses.
Section 115 arose out of concern with a substantial increase in the volume of multijurisdictional litigation against Delaware firms involving corporate law issues. Traditionally, most corporate law cases involving a Delaware corporation were tried in the Delaware Chancery Court. Starting around 2000, however, there were two dramatic changes in corporate litigation. First, there was a substantial increase in the number of cases being brought, especially with respect to mergers and acquisitions. Indeed, lawsuits challenging some aspect of an acquisition became near universal. Second, it became common for multiple lawsuits to be filed in multiple jurisdictions against each deal.
In response, Delaware corporations began adding forum selection clauses to their certificates of incorporation. In 2010, dicta in an opinion by Vice Chancellor Laster suggested that the Delaware courts would look favorably upon such clauses: “if boards of directors and stockholders believe that a particular forum would provide an efficient and value-promoting locus for dispute resolution, then corporations are free to respond with charter provisions selecting an exclusive forum for intra-entity disputes.” In re Revlon, Inc. Shareholders Litig., 990 A.2d 940, 960 (Del. Ch. 2010). Laster’s prediction was confirmed in Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013), in which then-Chancellor Leo Strone upheld bylaws “providing that litigation relating to [the company’s] internal affairs should be conducted in Delaware.” Id. at 937. Section 115 subsequently codified that holding.
As noted, Section 115 did not address the question of whether a corporation could adopt a similar provision addressing claims arising under federal law. The precedent it created, however, encouraged firms to respond to the growing number of lawsuits being brought under federal law. Plaintiffs’ counsel long had looked to evade the restrictions put on federal securities lawsuits by the Private Securities Litigation Reform Act by bringing federal claims in state court. This trend got a boost from the U.S. Supreme Court’s decision in Cyan, Inc. v. Beaver County Employees Ret. Fund, 138 S. Ct. 1061 (2018), which held that Securities Act claims could be brought in state court and that such claims could not be removed to federal court.
Because many companies believed that state courts were more pro-plaintiff than federal courts and because they wished to avoid multiple suits being brought in multiple states, they began adopting federal forum selection clauses such as those instituted by Blue Apron, Roku, and Stitch Fix. The version adopted by both Roku and Stitch Fix is typical:
Unless the Company consents in writing to the selection of an alternative forum, the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933. Any person or entity purchasing or otherwise acquiring any interest in any security of [the Company] shall be deemed to have notice of and consented to [this provision].
When an investor sued in Chancery Court seeking a declaratory judgment that these federal forum selection clauses were illegal under Delaware law, VC Laster agreed. He first held that the analysis used in Boilermakers to determine the validity of forum selection bylaws also applied to forum selection provisions in certificates of incorporation. Laster next interpreted Boilermakers as drawing a sharp line between litigation involving internal corporate matters—such as corporate law claims against a firm’s directors and officers—and litigation involving external matters—such as “a bylaw that purported to bind a plaintiff, even a stockholder plaintiff, who sought to bring a tort claim against the company based on a personal injury she suffered that occurred on the company’s premises.” Boilermakers, 73 A.3d at 952. Only the former would be proper.
Finally, Laster concluded that claims arising under federal securities law fell into the prohibited external category:
For purposes of the analysis in Boilermakers, a 1933 Act claim resembles a tort or contract claim brought by a third-party plaintiff who was not a stockholder at the time the claim arose. At best for the defendants, a 1933 Act claim resembles a tort or contract claim brought by a plaintiff who happens also to be a stockholder, but under circumstances where stockholder status is incidental to the claim. A 1933 Act claim is an external claim that falls outside the scope of the corporate contract.
Sciabacucchi v. Salzberg, 2018 WL 6719718, at *18 (Del. Ch. Dec. 19, 2018), rev’d, 2020 WL 1280785 (Del. Mar. 18, 2020).
In reversing, the Delaware Supreme Court began with the text of DGCL § 102(b)(1), which addresses provisions that may be included in a certificate of incorporation and, in pertinent part, authorizes:
 Any provision for the management of the business and for the conduct of the affairs of the corporation, and  any provision creating, defining, limiting and regulating the powers of the corporation, the directors, and the stockholders, or any class of the stockholders …. (Enumeration supplied.)
The Court then concluded that a federal forum selection clause was authorized under either of the pertinent clauses of § 102(b)(1):
The drafting, reviewing, and filing of registration statements by a corporation and its directors is an important aspect of a corporation’s management of its business and affairs and of its relationship with its stockholders. This Court has viewed the overlap of federal and state law in the disclosure area as “historic,” “compatible,” and “complimentary.” Accordingly, a bylaw that seeks to regulate the forum in which such “intra-corporate” litigation can occur is a provision that addresses the “management of the business” and the “conduct of the affairs of the corporation,” and is, thus, facially valid under Section 102(b)(1).
Salzberg v. Sciabacucchi, 2020 WL 1280785, at *4 (Del. Mar. 18, 2020).
The Court buttressed that fiat with several additional arguments. First, it cited precedents holding that § 102(b)(1) is broadly enabling and thus only invalidates provisions forbidden by well-settled public policies. No such policies were implicated by the clauses in question. To the contrary, the Court had earlier in its opinion reasoned that state policy argued in favor of the clauses. It noted the rapid recent growth of Securities Act claims arising out of a single transaction being brought in multiple state courts. The Court asserted that the “costs and inefficiencies” of multijurisdictional litigation “are obvious.” Id. at *5. A federal forum selection clause reduced those costs by sending such cases to “to federal courts [where] coordination and consolidation are possible.” Id.
Second, noting that amendments to the certificates of incorporation require shareholder approval, the Court invoked Delaware precedents holding that “stockholder-approved charter amendments are given great respect.” Id. at *6. Relatedly, the Court reaffirmed that the DGCL in general and § 102(b) in particular are enabling and “allow immense freedom for businesses to adopt the most appropriate terms for the organization, finance and governance of their enterprise.” Id.
In addition to several other statutory arguments, the Court expressly rejected Laster’s narrow interpretation of corporate internal affairs. In doing so, the Court distinguished the sort of external matters identified by Boilermakers from the claims covered by the federal forum selection clauses, explaining that with those “types of claims, no Board action is present as it necessarily is in Section 11 claims, and those claims are unrelated to the corporation-stockholder relationship.” Id. at *12. In addition, the Court declined to embrace a sharp distinction between internal and external matters, observing that various matters fall “on a continuum” between those polar extremes. Id. at *13.
To illustrate its point, the Court offered the following diagram:
The court went on to explain that:
… there is an area outside of the “internal affairs” boundary but within the Section 102(b)(1) boundary (between points B and C on Figure 1), which, for convenience, we refer to as Section 102(b)(1)’s “Outer Band.” It is well-established that matters more traditionally defined as “internal affairs” or “internal corporate claims” are clearly within the protective boundaries (from points A to B) of Edgar, McDermott, and their progeny, where only one State has the authority to regulate a corporation’s internal affairs—the state of incorporation. There are matters that are not “internal affairs,” but are, nevertheless, “internal” or “intra-corporate” and still within the scope of Section 102(b)(1) and the “Outer Band,” represented in Figure 1 between points B to C. [Federal-forum provisions] FFPs are in this Outer Band, and are facially valid under Delaware law because they are within the statutory scope of Section 102(b)(1), as explained above.
In the wake of this decision, two questions present themselves. First, as the Court itself noted, there is a “’down the road’ question of whether they will be respected and enforced by our sister states.” Id. at *20.
… we recognize that it is a powerful concern that has infused much of the briefing here. The fear expressed in some of the briefing is that our sister states might react negatively to what could be viewed as an out-of-our-lane power grab. Some say that this perception, in turn, could invite greater scrutiny of even the well-established and respected “internal affairs” territory. Or it could invite a move towards federalization of our corporate law. These are legitimate concerns. Delaware historically has, and should continue to be, vigilant about not stepping on the toes of our sister states or the federal government.
But there are persuasive arguments that could be made to our sister states that a provision in a Delaware corporation’s certificate of incorporation requiring Section 11 claims to be brought in a federal court does not offend principles of horizontal sovereignty—just as it does not offend federal policy.
Second, what limits are there, if any, on the ability of corporations to adopt charter or bylaw provisions limiting shareholder rights? Widener University corporate law professor Lawrence Hamermesh has reportedly suggests that “fee-shifting provisions, class action waivers, or mandatory arbitration clauses” may now be valid. In contrast, prominent Delaware practitioner Francis Pileggi notes a footnote in the opinion suggesting that ““just because we’ve upheld the federal forum selection clause doesn’t mean that the floodgates are going to be open to allow arbitration provisions”:
Much of the opposition to FFPs seems to be based upon a concern that if upheld, the “next move” might be forum provisions that require arbitration of internal corporate claims. Such provisions, at least from our state law perspective, would violate Section 115 which provides that, “no provision of the certificate of incorporation or the bylaws may prohibit bringing such claims in the courts of this state.” 8 Del. C. § 115; see Del. S.B. 75 syn. (“Section 115 does not address the validity of a provision of the certificate of incorporation or bylaws that selects a forum other than the Delaware courts as an additional forum in which internal corporate claims may be brought, but it invalidates such a provision selecting the courts in a different State, or an arbitral forum, if it would preclude litigating such claims in the Delaware courts.” (emphasis added)).
Id. at *23 n.169. Note, however, that the footnote only addresses mandatory arbitration of state law-based claims. It does not speak to the question of whether a charter might mandate arbitration of federal securities law claims. Likewise, the Court’s diagram itself suggests that there are a range of shareholder claims as to which § 115 would not ban fee shifting bylaws.
The post Delaware Supreme Court Validates Forum Selection Articles Sending Cases to Federal Court appeared first on Washington Legal Foundation.
“The Supreme Court should make the Ninth Circuit reconnect its reading of the FAA’s saving clause to what that clause actually says.”
—Corbin K. Barthold, WLF Senior Litigation Counsel
Click HERE for WLF brief.
(Washington, DC)—On Tuesday, March 24, Washington Legal Foundation filed an amicus curiae brief urging the U.S. supreme Court to review a Ninth Circuit decision that misconstrues the Federal Arbitration Act’s saving clause.
McGill v. Citibank, N.A., 2 Cal. 5th 945 (2017), says that an arbitration clause may not extinguish a party’s right to seek injunctive relief for the public at large. The Ninth Circuit held that this “McGill rule” is not preempted by the FAA. Under the FAA’s saving clause, an arbitration agreement that is otherwise enforceable under federal law remains subject to any generally applicable state-law contract defense. The McGill rule, the Ninth Circuit concluded, is such a defense.
As the Ninth Circuit acknowledged, however, the McGill rule arises from California Civil Code § 3513, a state “maxim of jurisprudence.” WLF contends in its brief that California’s maxims of jurisprudence are not contract defenses that properly trigger the FAA’s saving clause.
Even if it stood on a real contract defense, WLF continues, the McGill rule would still be preempted. Although the Ninth Circuit cited some old cases unrelated to arbitration that involve § 3513, today the California courts use § 3513 specifically as a cudgel for striking down arbitration agreements. The FAA preempts a state rule whose only purpose is to serve as a tool
for striking down arbitration clauses.
Celebrating its 43rd year as America’s premier public-interest law firm and policy center, WLF advocates for free-market principles, limited government, individual liberty, and the rule of law.
The post WLF Urges Supreme Court To Restore Proper Reading Of FAA Saving Clause appeared first on Washington Legal Foundation.
“Today’s unanimous decision restores common sense and uniformity to the pleading threshold for discrimination claims under § 1981.”
—Cory Andrews, WLF Vice President of Litigation
WASHINGTON, DC—A unanimous U.S. Supreme Court today overturned a Ninth Circuit decision that would have made it nearly impossible for defendants to win pretrial dismissal of even frivolous discrimination claims. The decision was a victory for WLF, which filed an amicus brief in the case arguing that, unless Congress specifies otherwise by statute, a plaintiff seeking to prevail on a discrimination claim must show that the defendant’s discriminatory conduct was the “but-for” cause of the alleged injury. Today’s ruling vacated an unpublished decision of the Ninth Circuit, which allowed a plaintiff to plead a discrimination claim merely by alleging that discrimination was “a factor” in the defendant’s decision-making, even if the defendant would have made the same decision had discrimination not been a factor.
At issue before the Court was 42 U.S.C. § 1981, a statute that prohibits racial discrimination in the making of contracts. The plaintiff, Entertainment Studios Networks (ESN), is a small, minority-owned television-program provider that has been unable to persuade major cable operators to carry its programming. ESN sued Comcast (and all the other large cable providers) under § 1981, alleging racial discrimination. Comcast denied the claim, insisting it denied a contract because ESN did not show adequate viewer interest in its programming. ESN’s complaint alleged no facts suggesting discriminatory motives; it merely claimed that its programming was at least as popular as the programming of non-minority companies that received contracts.
Celebrating its 43rd year, WLF is America’s premier public-interest law firm and policy center advocating for free-market principles, limited government, individual liberty, and the rule of law.
The post SCOTUS Unanimously Holds that Plaintiffs Must Prove Causation in Discrimination Cases appeared first on Washington Legal Foundation.
As part of a Truth on the Market blog series on the law, economics, and policy of the ongoing COVID-19 pandemic, WLF Senior Litigation Counsel Corbin K. Barthold authored the March 23 post, “There is No Cure for Government Incompetence.”
Corbin cautions that while Americans are understandably looking to government for leadership and reassurance during the pandemic, “that pernicious line, ‘Don’t let a crisis go to waste’ is in the air.” He chides “political gougers” for trying to “cram woke diktats” into disaster-relief legislation and progressive commentators for peddling the notion that, in response to the crisis, we should “restore the expansive state of yesteryear”:
“This is nonsense. Our [current] government is not incompetent because Grover Norquist tried (and mostly failed) to strangle it. Our government is incompetent because, generally speaking, government is incompetent. The keystone of the New Deal, the National Industrial Recovery Act of 1933, was an incoherent mess. Its stated goals were at once to ‘reduce and relieve unemployment,’ ‘improve standards of labor,’ ‘avoid undue restriction of production,’ ‘induce and maintain united action of labor and management,’ ‘organiz[e] . . . co-operative action among trade groups,’ and ‘otherwise rehabilitate industry.’ The law empowered trade groups to create their own ‘codes of unfair competition,’ a privilege they quite predictably used to form anticompetitive cartels.”
Americans will not, Corbin writes, “long tolerate a statist revolution imposed on their fears. And thank goodness for that.”
He concludes: “[W]e can be confident that, come what may, planned administration will remain a source of problems, while unplanned free enterprise will remain the surest source of solutions.”
The post WLF Attorney Pens Timely <em>Truth on the Market</em> Post on Covid-19 and Government appeared first on Washington Legal Foundation.
Washington Legal Foundation mourns the passing of Legal Policy Advisory Board member Gerald J. Mossinghoff. Gerry served with distinction on WLF’s board for nearly two decades, drawing on his sophisticated knowledge of patent law to inform our involvement in patent litigation and legal policy developments. He also authored several WLF publications and participated in WLF media briefing and webinar programs. “Gerry devoted his career in public service, private practice, and academia to intellectual-property law and the protection of the rights that incentivize innovation in drug development,” said Connie Larcher, WLF’s President and CEO. “He shared his talents and insights with the WLF team generously and joyously. Our thoughts are with his family and his many former colleagues.”
The post WLF Mourns the Passing of Advisory Board Member Gerry Mossinghoff appeared first on Washington Legal Foundation.
On March 16, a diverse group of corporations, represented by federal discovery-process expert Robert D. Owen, filed an amicus curiae brief supporting generic drug makers’ certiorari petition in Actavis Holdco, Inc. v. Connecticut. A WLF Legal Pulse post from March 6 discussed the nature of the petition and argued that the Supreme Court should grant certiorari. We’re honored that the companies’ brief quoted from and cited to this March 6 WLF post (albeit the Forbes.com version of it).
In a nutshell, a federal district court’s discovery order in a multidistrict price-fixing litigation imposed a draconian production regime, which mandated delivery of all requested electronic documents and didn’t allow defendants to conduct relevance and responsiveness review. The MDL judge denied the defendants’ request for a stay of the order, as did the Third Circuit on appeal (with Judge Phipps dissenting). The defendants sought a stay from the Supreme Court pending a decision on their certiorari petition, which the Court denied.
The companies’ brief joins supportive amicus briefs by the Chamber Litigation Center/PhRMA/NAM/ATRA, Lawyers for Civil Justice, and the Defense Research Institute. The company brief’s signatories include pharmaceutical manufacturers GlaxoSmithKline and Genetech, 3M, Microsoft, and several financial services businesses, among others.
In addition to detailing the order’s violation of several Federal Rules of Civil Procedure, the brief explains the impact such broad discovery’ has on third parties not involved in the litigation. The brief stresses, “In the normal course of their businesses, amici curiae companies, like all companies, regularly exchange with other entities highly confidential and valuable information via email.” Once that information, which is likely immaterial to the underlying dispute, is exchanged, third parties have no way of knowing that the information has been exposed. Also, as the brief notes, “parties [directly involved in the dispute] do not have standing to protect proprietary or confidential business information of third parties.”
The brief goes on to discuss how an order like that in Actavis Holdco is at odds with the growth of strict controls over personal electronic data imposed through state and foreign laws. By design, the discovery process is an intrusion on privacy. That is why, as the brief explains, close judicial oversight is essential:
“Discovery is a serious intrusion into the privacy rights of the parties as well as others having nothing to do with the dispute. As a society, we allow it because it is necessary for the truth-seeking needs of the judicial system.”
The companies’ brief adds a compelling voice to those encouraging the justices to grant review in Actavis Holdco. We’ll continue to monitor developments.
The post Update: 12-Company Brief Urges SCOTUS Review of Lawless Discovery Order appeared first on Washington Legal Foundation.
Stephen A. Wood is a Partner with Chuhak & Tecson, P.C. in Chicago, IL and serves as the WLF Legal Pulse’s Featured Expert Contributor on the False Claims Act.
Can a medical opinion that serves as the basis for a treatment recommendation and subsequent federal Medicare/Medicaid reimbursement qualify as a false statement subjecting a defendant to liability under the False Claims Act? That was the question at issue in United States v. AseraCare, Inc., 938 F.3d 1278 (11th Cir. 2019). On appeal from the trial court’s post-verdict grant of summary judgment for the defendant (that’s correct, post-verdict summary judgment), the Eleventh Circuit explored the various angles of how statements of opinion could possibly represent false statements leading to FCA liability. The case is important for what it says not only about the requirement of falsity under the FCA, but also the government’s enforcement zeal where the defendant’s conduct falls short, even well short, of an intent to commit fraud.
United States v. AseraCare—The Facts
The defendants in this case provide end-of-life hospice care services to patients. They operated a network of 60-some facilities located in 19 states, taking in roughly 10,000 patients annually. The vast majority of these 10,000 or so patients were enrolled in Medicare, and Medicare payments represented 95% of the defendants’ revenues.
As with all programs administered by Medicare and overseen by the Centers for Medicare and Medicaid Services (CMS), federal statutes and regulations govern reimbursement. Federal law required a patient’s attending physician, if any, as well as the medical director of the hospice provider to certify in writing upon admission to hospice that an individual patient was terminal “based on the physician’s clinical judgment regarding the normal course of the individual’s illness.” 42 USC § 1395f(7)(A). A patient is considered terminal if the patient’s life expectancy is determined to be 6 months or less. The certification must be accompanied by medical documentation that supports the prognosis.
An initial certification is valid for 90 days. To qualify for continued reimbursement beyond this period, providers must recertify every 90 days as long as the patient remains in hospice. Importantly, the regulations acknowledge that determining how long a terminal individual may live is difficult and prognoses are imprecise. Thus, the regulations permit reimbursement beyond 6 months as long as medical professionals periodically recertify. Just as patients may live in hospice for periods longer than 6 months, the regulations also contemplate that patients may improve and leave hospice. Given these circumstances, federal law imposes no statutory time limit to Medicare reimbursement for hospice care. AseraCare, 938 F.3d at 1282-83.
In 2008, three former employees of the defendants filed suit under seal in U.S. District Court for the Eastern District of Wisconsin, pursuant to the qui tam provisions of the FCA. These relators alleged that defendants submitted claims for Medicare reimbursement for hospice care for patients who were in fact ineligible. Two subsequent qui tam suits were filed, one in the Northern District of Alabama in 2009, another in the Northern District of Georgia in 2010, each claiming that defendants sought reimbursement for care of patients who were not terminal. In 2012, the Wisconsin and Georgia cases were transferred to and consolidated with the Northern District of Alabama action.
The Trial Court Proceedings—A Bifurcated Trial and a Government Victory
This was not an overbilling or false billing case. That is, in the consolidated action, the government did not claim that defendants sought reimbursement for non-existent patients, or that the defendants falsified documentation. In each patient’s case, the defendants produced documentation of the patient’s medical condition and certification by an appropriate medical professional. Id. at 1285. The government’s claim was, instead, that defendants’ certifications were not medically supportable, that many of the patients were in fact not terminally ill.
The government’s analysis concentrated on defendants’ billing of Medicare for at least 365 continuous days of hospice care, which yielded a set of 2,180 patients. Id. at 1284-85. From this number, the government selected a sample of approximately 10% and submitted their documentation to several retained expert physicians. The government’s plan was to contest the medical prognosis of these patients and employ an econometrician to establish damages and penalties as to the larger set using statistical proof. Apart from expert medical testimony, the government also sought to introduce evidence of the defendants’ business practices—for example, that the defendants’ physicians at times “rubber-stamped” certifications without exercising reasoned judgment based on the patients’ medical records.
Defendants moved for summary judgment based on lack of evidence of falsity. They argued that unless the government could show that no reasonable physician would have concluded that a given patient was terminally ill, its claims were not false. Put differently, the defendants argued that if the government’s evidence amounted to nothing more than a difference of opinion between doctors, the defendants’ certifications could not be false. This motion was denied.1
In an interesting procedural turn, over the government’s objection, the trial court granted the defendants’ motion to bifurcate the trial of the case under F.R.C.P. 42(b). Agreeing with the defendants that falsity was a threshold issue, and that other evidence, primarily of the defendants’ allegedly sloppy general-business practices, would only confuse the jury and complicate its evaluation of the falsity of the certifications, the district court limited the trial to the issue of falsity. As the appellate court’s opinion stated: “In the [district] court’s view, allowing the Government to present knowledge evidence before falsity was determined would be unduly prejudicial to AseraCare, thus warranting separation of the knowledge and falsity elements.” Id. at 1287. Some evidence of the defendants’ business practices was allowed during this phase, but only for the purpose of providing “context,” and not for its relevance to the issue of falsity.
During the trial, the government presented expert medical evidence contesting the defendants’ patient certifications. The government’s expert was on the stand for several days walking through his assessment of the medical records of the patients at issue, testifying that the records did not support a prognosis of terminal illness qualifying for hospice care. This expert did not claim that no reasonable doctor could have concluded that the patients at issue were terminally ill. Rather, he testified that in his professional opinion the patients were not terminally ill. Incredibly, during the government expert’s testimony, it was revealed (whether on direct or cross is unclear) that he had actually changed his opinion on the terminal condition of several of the patients at issue. That is, he reconsidered his opinions and concluded that some of the patients he had initially deemed not terminally ill were in fact terminal. The defendants offered expert medical testimony of their own supporting the accuracy of the diagnoses made in the patient certifications.
In the face of this battle of the experts, the jury’s job, boiled down to its essence, was to determine which expert was the more persuasive. The circumstances of one patient, identified in the appellate opinion as “Elsin K.,” illustrate the difficulty confronting the jury. Elsin K. was in hospice care for more than a year before she ultimately died. She had been diagnosed with “debility,” also called “adult failure to thrive,” a condition characterized by the patient’s gradual physical and mental decline due to old age. Elsin’s course was not, however, steady or consistent. At times she improved and was able to leave hospice only to return later when her condition deteriorated. The defendants’ and the government’s medical experts disagreed over her eligibility for hospice even though they agreed on her underlying diagnosis. The government’s expert opined that many of Elsin’s ailments, including severe infections arising from a joint replacement, were chronic and she did not demonstrate the level of physical debility typically associated with terminally-ill patients. The defendants well-qualified experts disagreed.
After approximately eight weeks of trial, at the close of the evidence, the court instructed the jury to answer special interrogatories regarding the prognoses of each of the 123 patients at issue. In its verdict, the jury found that defendants had submitted false claims for 104 of the 123 patients (despite the government’s expert’s flip-flop on several of these prognoses).
Post-Trial Proceedings—The Government’s Victory is Short-Lived
In their post-trial motion, the defendants again challenged the legal standard upon which the court instructed the jury, contending that a difference of opinion between experts does not establish falsity. Not only did the trial court agree with the defendants’ arguments on that point, it went beyond granting a new trial and, under F.R.C.P. 56(f)(3), sua sponte reconsidered its denial of the defendants’ motion for summary judgment, inviting briefing on the issue noting that the government cannot prevail “if all the Government has as evidence of falsity in the second trial is [the government’s expert’s] opinion based on his clinical judgment and the medical records that he contends do not support the prognoses for the 123 patients at issue in Phase One.” Id. at 1290. After briefing and argument the district court granted summary judgment in favor of the defendants noting that with the opinions of its experts regarding the prognoses of the patients at issue as the only admissible evidence, the government had failed to establish proof of an objective falsehood.
The Appeal—Affirming a Requirement of Objective Falsity
On appeal, the government sought reinstatement of the jury’s verdict. The government argued that falsity is established where an expert opines that a patient’s medical records do not support a terminal illness prognosis. Where the parties present competing expert views on prognosis, falsity becomes a question for the jury. In opposition, the defendants argued that where certifying physicians exercise their reasoned clinical judgment, falsity cannot be established as a matter of fact, and there is no consequent liability under the False Claims Act.
Apart from arguing over the correct standard, the government’s appellate argument consisted of a parade of horribles wrought by the district court’s reasoning on the legal standard. The government argued that the court’s interpretation deferred too much to physicians and that all a hospice need do is enlist a licensed doctor willing to certify for a fee, regardless of the patient’s underlying condition. In addition, the government argued that affirming the trial court would invade the province of the jury, which is to decide the facts when there is a factual dispute. Finally, the government complained that a requirement of objective falsehood would result in “under-inclusion,” that hospice providers with sloppy or improper admission practices may evade FCA liability. The Eleventh Circuit rejected each of these arguments on its way to affirming the district court’s decision to grant defendant a new trial.
After reviewing the statutory and regulatory framework for hospice eligibility, the Eleventh Circuit concluded that physician judgment was the prevailing determinant:
The language of the statute and implementing regulations makes plain that the clinical judgment of the patient’s attending physician (or the provider’s medical director, as the case may be) lies at the center of the eligibility inquiry. Under this language, a patient is eligible for the Medicare hospice benefit if the appropriate physician makes a clinical judgment that the patient is terminally ill in light of the patient’s complete medical picture, as evidenced by the patient’s medical records.
Id. at 1293. The appellate court noted that the regulations themselves recognize that predicting life expectancy “is not an exact science” and that certifying physicians are expected to “use their best clinical judgment.” Id. at 1294. “It follows that when a hospice provider submits a claim that certifies that a patient is terminally ill ‘based on the physician’s or medical director’s clinical judgment . . . the claim cannot be ‘false’ . . . if the underlying clinical judgment does not reflect an objective falsehood.” Id. at 1296-97.
Although the Eleventh Circuit agreed with the district court’s analysis on the legal standard to be applied, that did not carry over to the sua sponte decision to grant summary judgment for the defendant. In essence, the appellate court stopped short of affirming the trial court’s decision to award judgment as a matter of law to defendants because the trial court did not consider additional evidence bearing on the defendants’ knowledge of falsity excluded from the trial in its decision to grant summary judgment. This evidence consisted of testimony of a former Director of Clinical Services that one physician signed patient certifications before reviewing any medical documentation whatsoever, that staff typically “just gave him … a stack of papers to sign, [and] he just signed the papers.” Id. at 1305. Another former employee testified that another physician “would nod off” while signing certifications. The district court should have considered this among other evidence of defendants’ certification practices in determining the existence of an issue of fact. Thus, the grant of summary judgment was reversed, and the case remanded for further proceedings consistent with this holding.
Takeaways From the AseraCare Decision
Falsity is the sine qua non of a False Claims Act case. True, in many cases falsity may not be seriously contested. For example, where a defendant overbills for a product or service or bills for services or products not provided, falsity will likely not be in question. But where falsity is an issue, it should be taken up as a threshold consideration. In some instances, falsity or lack thereof may not be obvious from a statement or record, and proof of surrounding circumstances may be necessary. Falsity may also, at times, be entwined with the element of scienter. Nonetheless, falsity should be examined prior to discovery and proof of other elements.
While scienter is generally subjective, falsity is an objective requirement. The FCA plaintiff must show that the statement or record at issue is, as a matter of objective proof, false, i.e., not true or not accurate. Most noteworthy in the AseraCare opinion is the appellate court’s reaffirmation of this requirement for an objective falsehood and rejection of the government’s proposed test. The government’s argument that a disagreement regarding medical prognosis among professionals gives rise to a jury question threatened to substantially erode the falsity requirement. The standard promoted by the government would have subjected defendants to liability for otherwise reasonable conduct if the government and its experts disagreed with the defendants’ judgments without more. This lowering of the liability bar by weakening the falsity requirement could have had wide-ranging consequences.
Falsity in each case may turn on a difference of opinion between witnesses for the government and the defendant. See, e.g., United States ex rel. Yannacopolous v. General Dynamics, 652 F.3d 818, 836-37 (7th Cir. 2011) (mere difference of interpretation regarding contract terms not an objective falsehood and not actionable under the FCA); United States ex rel. Wilson v. Kellogg Brown & Root, Inc., 525 F.3d 370, 376 (4th Cir. 2008) (“To satisfy [the] first element of an FCA claim, the statement or conduct alleged must represent an objective falsehood.”). Unless the defendant’s opinions are objectively unreasonable, no such case should ever proceed past summary judgment. Consider also that the government’s falsity argument was an unnecessary and significant prosecutorial stretch. As the AseraCare court noted, statements of opinion per se are not insulated from a claim of falsity. If it can be shown that the defendant did not hold the opinion stated, did not review the facts upon which the opinion was ostensibly based, or that the opinion was based on information that the defendant knew to be untrue, an opinion could be false.
Finally, it is worth noting that AseraCare was a false certification case in that the government contended that the defendants’ certifications of hospice eligibility failed to comply with governing regulations and were false. As such, the Supreme Court’s decision in Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016) comes squarely into play, including the High Court’s pronouncements regarding the requirement of materiality. This requirement, expressly stated in only two of the seven liability provisions of the FCA (31 U.S.C. §§ 3729(a)(1)(B) and (G)), is now, by virtue of the Escobar holding, a “demanding” requirement in all FCA cases. Since Escobar involved a claimed violation of §3729(a)(1)(A), the materiality requirement could only have applied to the falsity element of that provision (the only other elements of which are scienter and presentment). The logic of this should be self-evident. The claim at issue must be materially false. Technical omissions, marginally relevant regulatory noncompliance, insignificant contractual breaches, differences of opinion, should not render a claim false for purposes of liability under the FCA.
Setting a clear, objective bar for falsity in FCA cases is in keeping with the principle that the False Claims Act is not an all-purpose anti-fraud statute. The Eleventh Circuit’s holding here is not only consistent with statutory objectives, not only logical and reasonable, it is in line with other cases. The requirement of falsity in all FCA cases is a requirement that the falsity of a statement or record be more than a debatable point, more than just a factual disagreement between competing positions. Evidence must be brought forth showing that the statement or record is, as a matter of fact, materially wrong.
The post Klobuchar antitrust bill cites patents as evidence of anticompetitive behavior appeared first on Washington Legal Foundation.
By Steven Cernak, a Partner with Bona Law PC in its Detroit, MI office who practiced antitrust law in-house with General Motors for over 20 years.
Since at least 1919, U.S. courts have acknowledged “the long recognized right [of even a monopolist] freely to exercise his own independent discretion as to parties with whom he will deal.”1 The U.S. Supreme Court most recently found an exception to that “long-recognized” right in 1985’s Aspen Skiing opinion2; however, that opinion was narrowed, but not overturned, by the Court itself as being “at or near the outer boundary of [Sherman Act] §2 liability.”3 Since then, lower courts have struggled to define if a monopolist can ever be liable for monopolization for a “refusal to deal” with a rival and, if so, the elements that must be alleged and proven.
Last month, the Seventh Circuit in Viamedia Inc. v. Comcast Corp.4 found that such refusal-to-deal claims can still be successfully alleged under Sherman Act Section 2 if plaintiff’s allegations mirror those in Aspen Skiing closely enough. If it stands, the opinion will make it much more difficult for monopolist defendants to dismiss such claims and avoid lengthy and expensive discovery.
Facts and Allegations
Television networks broadcast their content through various distributors, especially cable companies. The networks control most television advertising time but cable companies receive two or three minutes each hour, called spot cable advertising. Cable companies sell some spot cable advertising that appears only on the local televisions in that cable company’s area. To reach an entire region, say, metro Detroit, all the cable companies in that area form an “interconnect” to sell advertising that will appear on televisions throughout the region. The interconnect is operated by the region’s largest cable company and the others pay a fee to participate. Some cable companies sell their spot cable advertising themselves while others hire a broker, called an ad rep.
Viamedia is an ad rep. Comcast is a cable company and an ad rep. Comcast operates the interconnects in Chicago and Detroit. Viamedia was an ad rep for two other companies in Chicago and Detroit. For ten years, Viamedia participated in those two interconnects on behalf of its clients. In 2012, the agreement authorizing that participation expired and Viamedia and Comcast could not agree on new terms. As a result, Viamedia and its two clients could not participate in those two interconnects. When Viamedia’s agreement with those two clients ended in 2015, Comcast reached an agreement to serve as an ad rep for them.
Viamedia sued Comcast and alleged a violation of Section 2 based on both refusal-to-deal and tying theories. Comcast successfully moved to dismiss the refusal-to-deal claim under both the original and amended complaint.5 Discovery ensued on the tying claim and then Comcast successfully moved for summary judgment. Last month, the Seventh Circuit reversed both lower court decisions and remanded for further proceedings.
Section 2 and Refusals to Deal
A successful monopolization claim requires proof that the defendant 1) has monopoly power in the relevant market and 2) acquired or maintained that power through exclusionary conduct, not “superior product, business acumen, or historic accident.”6 The first element can be difficult to prove in any particular case but generally is not controversial and was not contested here. The conduct element is very controversial and has resisted attempts by courts and commentators to develop a general definition: “Whether any particular act of a monopolist is exclusionary, rather than merely a form of vigorous competition, can be difficult to discern.”7 As a result, courts have focused on standards for determining when specific types of conduct can be judged “exclusionary.”
For refusals to deal by a monopolist, the standard that lower courts struggle to apply starts with Aspen Skiing. In that case, the defendant owned three of the four ski mountains in the Aspen area while the plaintiff owned the fourth. For years, even prior to when defendant controlled three mountains, a joint ski pass for all four mountains was offered to skiers. Customers enjoyed the convenience of purchasing up front while maintaining the ability to decide each day the mountain on which to ski.
The defendant effectively discontinued the joint arrangement by offering the plaintiff only a lower portion of the joint revenues. Plaintiff attempted to cobble together a replacement by offering to purchase at retail lift tickets to defendant’s mountains to combine with tickets to its own mountain. Defendant refused. Defendant’s justifications for its refusal “to support our competition”8 included the difficulties of administering the joint ticket and splitting the revenues plus the alleged injury to its brand image from associating with the supposedly inferior services of plaintiff.9
At trial, the jury rejected defendant’s explanations and found that defendant had monopolized the market. The Court affirmed, finding the evidence “adequate to support the verdict under the instructions given.”10 In doing so, the Court listed several factors, although without explaining the weight attributed to any of them. First, the defendant had voluntarily “elected to make an important change in a pattern of distribution that had originated in a competitive market”11 that, presumably, was efficient and profitable. Second, defendant refused to sell tickets to plaintiff at retail, even when it could do so with no cost to itself and such a decision denied it immediate benefits. Finally, the evidence regarding defendant’s justifications for its actions was disputed and the jury chose to believe the plaintiff.
The Court clarified and distinguished Aspen Skiing in 2004’s Trinko. First, the Court emphasized the usual rule that even a monopolist can refuse to deal with anyone, including a rival, and that the Court had been “very cautious in recognizing … exceptions.”12 In a line destined to be repeated in every refusal-to-deal opinion, brief, and article (including this one), the Court then described Aspen Skiing as “at or near the outer boundary of §2 liability.”13 The Trinko Court emphasized the Aspen Skiing defendant’s unilateral decision to terminate a “voluntary (and thus presumably profitable) course of dealing” and its “willingness to forego short-term profits to achieve an anti-competitive end” as evidenced by its refusal to sell tickets to the plaintiff even at retail prices.14
Multiple lower courts have tried to apply the Court’s teaching from Aspen Skiing and Trinko. Perhaps the leading case is the Tenth Circuit’s opinion in Novell, Inc. v. Microsoft Corp., authored by then-Judge Gorsuch.15 Like in Trinko, the court emphasized that plaintiffs must show the defendant terminated a pre-existing voluntary course of dealing and that such a decision suggested “a willingness to forego short-term profits to achieve an anti-competitive end.”16 The Tenth Circuit noted, however, that a monopolist might “forego short-term profits” for a pro-competitive end; therefore, the plaintiff also needed to show that this particular decision was part of a larger anticompetitive scheme, such as driving out or disciplining a rival. “Put simply, the monopolist’s conduct must be irrational but for its anticompetitive effect.”17
Two even more recent cases have granted or affirmed motions to dismiss where the plaintiff failed to properly allege that the monopolist’s refusal to deal was “irrational but for an anticompetitive purpose.”18 In both cases, however, a pre-existing voluntary course of dealing was also absent.
District Court Opinion
In dismissing Viamedia’s refusal-to-deal claim, the district court acknowledged that Comcast had terminated a voluntary course of dealing when it did not renew the interconnect agreement; however, the court found that Viamedia did not allege that Comcast had forsaken “short-term profits to achieve an anticompetitive end.”19 The court followed the Tenth Circuit’s Novell opinion in finding that Viamedia needed to allege that Comcast’s actions were “irrational but for its anticompetitive effect” or “serve no rational procompetitive purpose.”20 The court found that Comcast replacing Viamedia as an intermediary between it and the cable companies reduced Comcast’s short-run revenues from interconnect fees but offered “potentially improved efficiency” for ad placement in the long run.21 As a result, the allegations did not meet the court’s view of Aspen Skiing’s limited exception to the general rule and so must be dismissed.
Seventh Circuit Opinions
All three judges on the Seventh Circuit panel agreed that the district court erred in dismissing the refusal-to-deal claim but offered two slightly different explanations. (The dissenting judge would have upheld Comcast’s summary judgment victory on the tying claim.) The majority reminded Comcast that the Aspen Skiing and Novell opinions were reviews of jury verdicts that weighed evidence of the rationales and effects of the defendants’ actions after weeks-long trials.22
While the Trinko opinion upheld a motion to dismiss, it did so, according to the majority, because the plaintiff’s allegation of “defendant’s prior conduct sheds no light upon [whether its actions] were prompted not by competitive zeal but competitive malice.”23 The majority explicitly followed the D.C. Circuit’s opinion in Covad24 in finding that all a plaintiff must allege is that defendant’s refusal to deal was “predatory” or anticompetitive. Viamedia’s allegations met that standard. Comcast’s argument that its refusal was not “irrational but for its anticompetitive effect” was one for a motion for summary judgment, not dismissal.25
The dissent concurred with the majority on the remand of the refusal-to-deal claim but its opinion nicely illuminates the key pleading question that is “up for debate” among lower courts.26 The dissent notes that the district court interchangeably found that Viamedia must show that Comcast’s conduct was “irrational but for its anticompetitive effect” or served “no rational procompetitive purpose.” The dissent saw subtle but key differences between the two phrases:
[T]he former provides an antitrust plaintiff the opportunity to argue that, despite some efficiency justification proffered by an antitrust defendant, the rational or intended goal of the conduct was its anticompetitive impact. The latter, in contrast, requires the antitrust defendant to put forward any evidence of some business reason for its conduct, regardless of potential anticompetitive effect.27
According to the dissent, the district court applied the latter, credited Comcast’s potential procompetitive purpose, and dismissed the claim. But in doing so, the district court “effectively held the plaintiff … cannot … ever advance past the pleading stage when a defendant asserts a procompetitive justification[.]”28 In rejecting that result, the dissent effectively applied the former and required a plaintiff only to plausibly allege anticompetitive conduct to survive a motion to dismiss. The dissent joined the majority in finding that Viamedia met that standard.29
Theories of Section 2 liability have been severely limited in recent decades, especially by Supreme Court opinions that impose burdens on plaintiffs that often seem practically impossible to meet.30 This case shows that, despite Trinko’s “at or near the outer boundary” description of Aspen Skiing, refusals to deal are not in that category. A plaintiff who convinces a court that its facts are effectively on all fours with those in Aspen Skiing can prevail.
The “termination of a prior voluntary course of dealing” element seems to be necessary, though not sufficient, to a successful refusal-to-deal claim; however, avoiding such situations in business can be practically difficult. Recall that the joint ski-pass ticket was in place well before the defendant in Aspen Skiing acquired all three of its ski mountains and supposedly gained monopoly power. Unfortunately, the best way for a monopolist to avoid suspicious terminations of such agreements could be to forego entering them in the first place, which might mean foregoing efficient and procompetitive collaborations.
Clarifications of Aspen Skiing in opinions like Novell that not all decisions to forego short-term profits are anticompetitive have been helpful for defendants and have further focused these cases on monopolist actions that truly harm competition, not just competitors. As this case shows, however, the debate over whether any particular refusal by a monopolist will eventually benefit competition and consumers can take years and lots of money to resolve.
Finally, if it stands and gains support in other circuits, this opinion will make it much more difficult for a monopolist defendant to dismiss such a claim at the pleading stage and avoid expensive discovery. On a motion to dismiss, the defendant will not be able to prevail by simply asserting that some rational potential procompetitive purpose or effect “is self-evident from the complaint.”31 Instead, the defendant moving to dismiss on the pleadings will have to show that the allegations do not raise any plausible anticompetitive purpose or effect, a much more difficult burden. As a result, more well-pleaded refusal-to-deal claims will survive to discovery.
By Christopher P. Gramling, Assistant General Counsel for Eli Lilly and Company, based in Indianapolis, IN; and Matthew J. Hamilton, a Partner, Mary Margaret Spence, a Senior Attorney, and Jason A. Kurtyka, an Associate, all resident in the Philadelphia, PA office of Pepper Hamilton LLP.
Summary: Defense counsel must educate courts on the asymmetrical burdens multidistrict litigation (MDL) imposes on MDL defendants, urge MDL judges to use existing techniques to vet plaintiffs’ claims, and advocate for civil rules revisions that can help the aggregation device meet its original goal of a just and efficient determination of litigation.
Note: WLF submitted this Working Paper along with a letter to the Administrative Office of the United States Courts‘ Committee on Rules of Practice and Procedure, which is evaluating proposals for new civil procedure rules for multidistrict litigation.
The post Early Assessment of Claims Can Help Reduce the MDL Tax appeared first on Washington Legal Foundation.
Ninth Circuit Says YouTube Not Subject To The First Amendment, But Debate Over Platform Liability Will Likely Continue
Megan L. Brown is a Partner with Wiley Rein LLP in Washington, DC, and the WLF Legal Pulse’s Featured Expert Contributor, First Amendment. Boyd Garriott and Jeremy Broggi are Associates with the firm.
Last month, the Ninth Circuit released an opinion in Prager University v. YouTube, holding that a plaintiff could not sue YouTube for violating the First Amendment because YouTube is a private entity. (This article does not discuss the Lanham Act holding of the opinion.) The Ninth Circuit joins the vast majority of courts on this issue, but its holding will likely fuel the ongoing debate among scholars and policymakers as to how Internet platforms should be treated under the First Amendment and as speakers more broadly.
As background, YouTube is the world’s largest video content platform. YouTube’s content is driven by third-party creators that produce videos that are hosted on the platform. To moderate the vast quantity of third-party video content available to its two billion users, YouTube employs several tactics. It allows individuals to browse in “Restricted Mode,” which prevents users from accessing “mature content,” such as videos about violence, sexual content, or drugs and alcohol. It also “demonetizes” videos—i.e., precludes third-party advertisements on videos—that contain inappropriate language, “hateful” or “incendiary” content, and other content YouTube deems insufficiently “advertiser-friendly.”
Prager University, or “PragerU”—a creator of conservative content—sued YouTube for allegedly censoring its content using the moderation practices described above. In particular, PragerU alleged that YouTube demonetized some of its videos and prevented some of its videos from appearing in “Restricted Mode.” PragerU argued that “YouTube’s outsize power to moderate user content is a threat to the fair dissemination of ‘conservative viewpoints and perspectives on public issues[.]’” Accordingly, PragerU brought suit under the First Amendment.
The Ninth Circuit refused to allow the suit to go forward because YouTube is not a governmental actor. As the court explained, “[t]he Free Speech Clause of the First Amendment prohibits the government—not a private party—from abridging speech.” And while a private party can sometimes be treated as the government for First Amendment purposes, the circumstances in which this is possible are limited.
The Supreme Court has held that for the First Amendment to apply to a private party, the private party must be performing a function that is “traditionally exclusively reserved to the State.” The Ninth Circuit explained that these functions include “running elections” and “operating a company town,” but “not much else.” According to the Ninth Circuit, YouTube’s content moderation did not meet this test because of a Supreme Court case decided last term: Manhattan Community Access v. Halleck. There, the Supreme Court held that “merely hosting speech by others is not a traditional, exclusive public function and does not alone transform private entities into state actors subject to First Amendment constraints.” Thus, the Ninth Circuit concluded that YouTube’s content-hosting function failed to render it a state actor for purposes of the First Amendment.
While the Ninth Circuit may have resolved this particular case, the overarching issue of how courts will treat online platforms as speakers—under the First Amendment and more broadly—is open. To begin, Halleck explicitly framed its holding narrowly, leaving open the possibility that “[d]epending on the circumstances,” it could find sufficient state action in future First Amendment cases. And some scholars have argued that the First Amendment should be expanded to Internet platforms under the theory that they are analogous to “company towns.” The doctrine is thus not entirely settled.
In the absence of settled doctrine, some companies are embracing self-regulation. Facebook, for example, recently published a thoughtful white paper examining key issues relating to content regulation. Academics are wrestling with similar issues. These and other efforts recognize that the philosophical commitment underlying the First Amendment—as Justice Holmes memorably put it in Abrams v. United States, that “the best test of truth is the power of the thought to get itself accepted in the competition of the market”—runs deep and often will have application outside the formal scope of the First Amendment.
There is a risk that online platforms could also face liability for third-party content in civil lawsuits in the future. To be sure, section 230 of the Communications Decency Act broadly immunizes Internet companies from liability for the posts of third parties on their platforms. For example, if a third party defames someone on YouTube, section 230 would generally prohibit a defamation suit against YouTube for hosting the content. But this may be changing. Both Republicans and Democrats have indicated that they are unhappy with section 230 immunity—albeit for different reasons. And the Department of Justice recently announced that it is explicitly exploring ways to pare back section 230 immunity. Accordingly, the days of hands-off moderation policies may be limited.
Moving forward, online platforms will likely continue to face efforts by scholars and plaintiffs trying to convince the courts that these platforms should be subject to the First Amendment’s constraints, and from policymakers trying to do away with section 230 liability.
Just like the free-enterprise system we work to preserve and defend, Washington Legal Foundation has persevered through crises and turbulent change since our founding in 1977. While taking the necessary precautions to protect the health of our team, WLF remains fully operational and continues to influence and educate the judiciary and other policy makers through our unique combination of litigation and publishing. American businesses need a stable rule of law and a legal system conducive to economic growth to fully recover from the effects of the novel coronavirus. Fighting for those principles has been our mission for over 43 years.
WLF President and CEO
Robert H. Wright is a Partner with Horvitz & Levy LLP in Los Angeles, CA and is the WLF Legal Pulse’s Featured Expert Contributor on Mass Torts—Asbestos.
The U.S. Court of Appeals for the Fifth Circuit’s recent decision addressing the Federal Officer Removal Statute could have ramifications far beyond the specific military procurement contract and claims in that case.
In Latiolais v. Huntington Ingalls, Inc., No. 18-30652, 2020 WL 878930 (5th Cir. 2020) the Fifth Circuit, sitting en banc, overruled its prior decisions that had limited the breadth of the Federal Officer Removal Statute. Those prior decisions held that a defendant seeking removal under the statute must show a causal nexus between the defendant’s actions under color of federal office and the plaintiffs’ claims.
But the prior decisions did not account for the statute’s amendment. In 2011, Congress broadened the statute, altering the requirement that a removable case be “for” any act under color of federal office, and permitting removability of a case “for or relating to” such acts. The Latiolais en banc court held that this change “plainly expresses that a civil action relating to an act under color of federal removal may be removed (if the other statutory requirements are met).” Id. at *3. Congress thus broadened federal officer removal to actions not just causally connected, but connected or associated, with acts under color of federal office.
Latiolais involved claims of negligent failure to warn and negligent failure to provide adequate safety equipment arising from alleged exposure to asbestos. The defendant in Latiolais asserted the government contractor defense. That defense applies when (1) the United States approved reasonably precise specifications; (2) the equipment conformed to those specifications; and (3) there were no dangers known to the defendant that were not known to the United States. Boyle v. United Technologies Corp., 487 U.S. 500, 501 (1988).
Latiolais held that a federal defense is colorable for purposes of the Federal Officer Removal Statute unless the defense is “wholly insubstantial and frivolous.” Latiolais, 2020 WL 878930, at *7. The defendant in Latiolais offered evidence that it contracted with the United States Navy to build and refurbish navy vessels, the Navy required asbestos for some purposes, and the Navy approved reasonably precise specifications for installing asbestos. In light of that evidence, the federal defense was neither wholly insubstantial nor frivolous, and thus supported removal.
Although the colorable federal defense giving rise to removal in Latiolais arose from a military procurement contract, the court’s analysis would seem to support removal to a much broader group of defendants. Most courts have held that the government contractor defense is not limited to military procurement contracts or confined to narrow categories of claims.
Although the Ninth Circuit held that the defense “is only available to contractors who design and manufacture military equipment” Cabalce v. Blanchard & Assoc., 797 F.3d 720, 731 (9th Cir. 2015), many other courts have applied the defense outside that context. For example, in Carley v. Wheeled Coach, 991 F.2d 1117, 1128 (3d Cir. 1993), the defendant manufactured a government ambulance in compliance with government contract specifications. The Third Circuit recognized that the government contractor defense is “available to nonmilitary contractors.” Id. at 1127-28 (emphasis added).
In Hudgens v. Bell Helicopters/Textron, 328 F.3d 1329, 1331-1332 (11th Cir. 2003), the defendant maintained Army helicopters. The Eleventh Circuit held the government contractor defense was not limited to design defects. Id. at 1344. “Although Boyle referred specifically to procurement contracts, the analysis it requires is not designed to promote all-or nothing rules regarding different classes of contract. Rather, the question is whether subjecting a contractor to liability would create a significant conflict with a unique federal interest.” Id.
In In re World Trade Ctr. Disaster Site Litig., 521 F.3d 169, 173-174 (2d Cir. 2008), the City of New York contracted with defendants to clean up the World Trade Center site after the terrorist attacks of September 11, 2001. The Second Circuit stated that the rationale for the government contractor defense would “extend to the disaster relief context due to the unique federal interest in coordinating federal disaster assistance and streamlining the management of large-scale disaster recovery projects.” Id. at 197.
In more recent cases, the Sixth and Eighth Circuits have recognized colorable Boyle defenses without reaching the merits of whether the defense was available to “non-military service contractors.” Jacks v. Meridian Res. Co., 701 F.3d 1224, 1235 (8th Cir. 2012) (recognizing colorable Boyle defense asserted by healthcare reimbursement services contractor); Bennett v. MIS Corp., 607 F.3d 1076, 1089-91 (6th Cir. 2010) (recognizing colorable Boyle defense asserted by mold remediation contractor).
Indeed, the United States Supreme Court has commented on the important role played by government contractors. See NASA v. Nelson, 562 U.S. 134, 139 (2011) (“Contract employees play an important role in NASA’s mission, and their duties are functionally equivalent to those performed by civil servants.”); see also Watson v. Philip Morris Companies, Inc., 551 U.S. 142, 153 (2007) (“The assistance that private contractors provide federal officers . . . helps officers fulfill . . . basic governmental tasks.”). The importance of that role would not seem dependent on whether the contract in question is one for military procurement.
As these cases show, the Latiolais decision is likely to have a wide impact, not limited to the facts of military procurement contracts or the claim at issue in that case, and will ease the standards that federal officers and their contractors must satisfy in seeking to move cases to federal court.
The Committee on Small Business will hold a markup of legislation to amend the Small Business Act and the Small Business Investment Act. The markup will be held at 11:30 A.M. on Wednesday, March 11, 2020, in Room 2360 of the Rayburn House Office Building. The items that will be marked up include:
• H.R. 6079, “Microloan Improvement Act of 2020”
• H.R. 6078, “Microloan Transparency and Accountability Act of 2020”
• H.R. XXXX, “504 Modernization and Small Manufacturer Enhancement Act of 2020”
• H.R. XXXX, “504 Credit Risk Management Improvement Act of 2020”
• H.R. XXXX, “STEP Improvement Act of 2020”
• H.R. 6021, “Northern Mariana Islands Small Business Development Act”
To view a livestream of the markup, please click here.