Will Kavanaugh's "Modern Approach" Change The Trajectory of Supreme Court Antitrust Jurisprudence?

Justice Kennedy swearing in Brett Kavanaugh to D.C. Circuit

In my last post, I discussed one of Judge Kavanaugh's antitrust opinions, in which he argued for a "modern approach" to antitrust law.  Others have similarly commented on Kavanaugh's willingness to modernize antitrust law by discarding outdated precedent and creating clear guidelines.  Professor Stephen Calkins notes that "modern" appears six times in Kavanaugh's dissent in Anthem and four times in Whole Foods.  In the latter case, Kavanaugh critiques older antitrust cases as "relics" with "loose" or "free-wheeling" analysis.  According to Kavanaugh modern approach, antitrust cases that have not "stood the test of time," should be pushed "to the jurisprudence sidelines."

Would this "modern approach" to antitrust law change the direction of the Supreme Court's jurisprudence?  It is hard to say.  After all, Justice Kennedy, whom Kavanaugh is nominated to replace, was himself a modernizer of antitrust law.  

Justice Kennedy authored the majority opinion in Brooke Group v. Brown & Williamson Tobacco, which heightened the standards for predatory pricing.  Kennedy held that a plaintiff must show that a defendant's price was below cost and that the defendant would be able to raise prices and "recoup" those loses after competitors left the market.  This modern standard is so hard to meet, that there have been virtually no successful predatory price cases after Kennedy's 1993 decision.

In Leegin Creative Leather Products v. PSKS, Justice Kennedy reversed 100-years of antitrust precedent in holding that resale price maintenance would no longer be considered per se illegal.  In so ruling, Justice Kennedy looked to modern "economic analysis," which showed that vertical retail price restraints could be procompetitive.  Rather than continuing to follow outdated precedent, Kennedy explained that the Sherman Act should be treated as a "common-law statute" which can "evolve[] to meet the dynamics of present economic conditions."  Kennedy was willing to overrule established precedent because "subsequent cases [and modern economic analysis] have undermined their doctrinal underpinnings."

Similarly, Kennedy joined the majority in Twombly in changing the pleading standards for antitrust cases.  That decision was based, in part, on the "costs of modern federal antitrust litigation and the increasing caseload of the federal courts."  Two years later, Kennedy himself was the author of the majority opinion in Iqbal which confirmed that Twombly's heightened pleading standards apply to all cases.   Together, Twombly and Iqbal represent the most significant change, or modernization, of civil procedure in decades.

Given Justice Kennedy's willingness to discard outdated precedent and modernize antitrust law based on our current understanding of economic principles, Judge Kavanaugh's "modern" approach to antitrust law will likely simply be an extension of Justice Kennedy's jurisprudence, rather than a new approach.  This is not altogether surprising considering that Judge Kavanaugh was a clerk for Justice Kennedy on the Supreme Court in 1993--the same year that Justice Kennedy created the modern standards for predatory pricing in Brooke Group.

Is "Plausibility" a Rorschach Test? The Fourth Circuit's Divided Opinion on Twombly's Motion to Dismiss Standard

A recent Fourth Circuit cases demonstrates the inherently subjective nature of the "plausibility" standard used to evaluate a motion to dismiss under Rule 12(b)(6).  This standard, first articulated by the Supreme Court in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), requires a district court to look beyond the face value of allegations in a complaint to determine if they are, in fact, "plausible."  The Supreme Court recognized that determining "plausibility" would be a "context-specific task that requires the reviewing court to draw on its own judicial experience and common sense."  The problem, however, is that different judges have different "experiences" and different notions of "common sense."

Those differences are on full display in the Fourth Circuit's opinion in SD3, LLC v. Black & Decker (U.S.) Inc. et al., 801 F.3d 412 (4th Cir 2015).  The opinion is worth reading both for its in-depth analysis of the "plausibility" standard and for the pithy back-and-forth attacks between the judges.

In this antitrust case, the plaintiff alleged that all of the major table-saw manufacturers conspired to boycott plaintiff's "SawStop" safety technology to keep it off the market.  The district court granted defendants' motion to dismiss, finding that the complaint did not plausibly allege an "agreement" or "conspiracy," a necessary element under Section 1 of the Sherman Act.

On appeal, a two-judge majority of the Fourth Circuit reversed, finding that the complaint had adequately alleged a conspiracy because plaintiff had alleged parallel conduct among the defendants plus additional factors suggesting an agreement, thus meeting the "parallel plus" standard under Section 1.  The majority criticized the district court for confusing the motion-to-dismiss standard with the standard for summary judgment and, in so doing, applying "a standard much closer to probability" than the "plausibility" standard from Twombly.

In a strongly worded dissenting opinion, Judge Wilkinson attacked the majority for misapplying Twombly.  The vigor of the dissent prompted Judge Wynn, of the majority, to write a separate and equally caustic concurring opinion taking shots back at the dissent.

Apart from the entertaining back-and-forth between the judges, this opinion displays the wide, yet hard to define, difference between something being plausible and implausible.  All three of the judges on the panel read the same complaint, and they all agree as to the elements of an antitrust claim and the standards for analyzing a motion to dismiss.  Although both sides quote the same language from Twombly, the real difference between the dissent and the majority/concurrence is how they apply Twombly to the allegations in the complaint.  This appeal did not involve a legal issue or a disputed fact so much as different perspectives or outlooks.

This case shows that "plausibility," like beauty, is in the eye of the beholder.  One judge looks at the allegations and declares them implausible.  Another looks at the same allegations and sees them as plausible.  When legal standards turn on something as amorphous as "plausibility," it is not surprising that there are such widely disparate opinions from very smart and very well-meaning judges.

It is somewhat surprising, however, that the judges engaged in such heated rhetoric when they all agree on the substantive and procedural rules.  This is not a case where the majority believes in X and the dissent believes Y.  Perhaps it is this inability to precisely describe the difference between believing something plausible and believing it implausible that gives rise to the personal attacks in this case.  One side cannot claim that the other side applied the wrong rule, so they attack each other's judgement, character or motives--sometimes in Latin and sometimes IN ALL CAPITAL LETTERS!

Whatever the reason, the dissent and concurrence are littered with caustic, sarcastic, and pithy attacks at each other.  The criticisms are so well written, that they need to be quoted at length to be fully appreciated:

WILKINSON, Circuit Judge, concurring in part and dissenting in part:

The majority's view of modern commerce is unfortunate...

I would suggest, most respectfully, that the majority has committed basic conceptual errors and that the consequences of those errors, which the majority prefers not to face and to dismiss as policy, are regrettable....

Twombly counsels that we not leap to pejorative explanations when legitimate business considerations are more likely at play....

... we should [not] rush too quickly to drape innocent commercial activity in sinister garb.  

The majority however, adopts the reverse sequence.  It fashions a template for the frustrated market participant: Whenever routine business decisions don't go your way, for whatever reason, simply claim an industry conspiracy under the Sherman Act and the courts will infer malfeasance.... WARNING: HOLDING OR ATTENDING THIS TRADE ASSOCIATION MEETING WILL INCREASE YOUR EXPOSURE TO ANTITRUST SUITS....

The majority's cardinal conceptual error lies in the adoption of an ends-based approach to parallel conduct in a circumstantial antitrust case... The majority thus uses its ends based analysis to reward the least marketable products with the greatest possibility of success.  WARNING: FAILURE TO ADOPT THIS PRODUCT FOR WHATEVER REASON WILL INCREASE YOUR EXPOSURE TO ANTITRUST SUITS....

The majority alights on a minor motif of that Supreme Court decision [Twombly], while leaving its main point wholly unobserved....  Put simply, the majority proceeds as if Twombly were at most persuasive authority, and not very persuasive authority at that....

The majority refuses to undertake this second, more analytical step [i.e., looking beyond the face value of the allegations to  determine if they are "plausible"].  My concurring colleague simply wishes it away.  There is a time warp here, a nostalgia for the old pleading ways and days.  Those earlier standards were easier for us, I admit.  But our nostalgia now flies in the face of a controlling Supreme Court decision....

The majority's assurance that of course district courts can control discovery is the sort of appellate wand-waving that ignores every reality on the ground...

With its its invented version of Twombly, the majority allows plaintiffs to contort normal marketplace behavior into a potential antitrust violation....

The majority's ready acceptance of [plaintiff's] unsupported superiority assumption is part of the fallacy of its ends-based perspective ....

The majority thus sets a nifty trap: if defendants engage in similar means, it's collusion; if they engage in dissimilar means, it's deceit. Given those options, businesses should either keep to themselves or close up shop....

The majority ignores all of this in its rush to flatten pleading standards, make communications perilous, and consign antitrust law to isolationist ends.  It is an odd time for the majority to assume a more isolationist stance.  It raises the risk that antitrust law will render American companies comparatively incommunicative and thus at a competitive disadvantage at the very time global commercial interactions are becoming more commonplace....

If the complaint had spun even a remotely plausible narrative of impermissible collusion, I should have been the first to waive it through the Twombly gates...  But I cannot conspire [pun intended, one must assume] with my colleagues in the demise of the Twombly decision.

WYNN, Circuit Judge, concurring:

"Judges ought to remember that their office is jus dicere, and not jus dare--to interpret the law, and not to make law or give law." ... Respectfully, the dissenting opinion strays beyond our limited review here and encroaches on policy issues best left to other branches of government...

First, rather than confront the issues actually in play, the dissenting opinion dresses up points of agreement as dire rifts.  The dissent asserts, for example, ... [listing things asserted by the dissent] ... Nonsense....

Second, rather than address [plaintiff's] complaint as it is written, the dissenting opinion employs verbiage like "commercial interactions" to revise the complaint so as to omit the allegations of a secret agreement to refuse to deal.  Again sounding in policy, the dissenting opinion asserts ...  Thus, the dissenting opinion editorializes ...  Yet, when read with a judicious eye, [plaintiff's] complaint clearly alleges ...

Ignoring such specific allegations to [plaintiff's] detriment is nothing shy of an all-out perversion of the generous lens through which we must view the complaint...

Finally, the dissenting opinion focuses on its own policy preferences, thereby abandoning this Court's limited role--which is simply to assess whether [plaintiff] plausibly alleges the elements of its Section 1 claim....

The dissenting opinion embarks on yet another odyssey into policy, as well as assumptions untethered to reality, must less the complaint at issue here ...

In sum, courts exist to resolve disputes, not to pervert procedural rules into swords with which to fight policy battles...  Accordingly with all due respect for the dissenting view, I joint in the judicious and well-reasoned majority opinion.

This does not sound like two judges who agree on both the procedural and substantive law, yet they do.  The difference is one of perspective, which probably explains the heated rhetoric.

Interestingly, the Fourth Circuit's panel opinion may not be the last word on this case.  A petition for certiorari is currently pending with the the United States Supreme Court.  Will the Supreme Court want to weigh in on the proper way to apply the "plausibility" standard it articulated in Twombly?  If so, will the Supreme Court be able to clarify the standard to assist lower courts?  Or is "plausibility" really just a Rorschach test that reflects back on the subjective beliefs of the judge?  Is there an objective standard here, or is "plausibility" merely in the eye of the beholder?  It will be interesting to watch how this dispute over civil procedure develops...

DISCLAIMER: Womble Carlyle represented one of the defendants in the district court case, prior to the Fourth Circuit appeal discussed in this post.

Supreme Court Rules NC Dentist Board Not Immune From Antitrust Scrutiny

Earlier this morning, in a 6-3 decision, the Supreme Court ruled that state professional boards comprised of active market participants are not immune from antitrust laws even though the boards are formally designated as a state agency, unless the state also provides active supervision of the boards' actions.

The case arose out of an FTC action against the North Carolina State Board of Dental Examiners ("Board") for issuing cease-and-desist letters to non-dentists offering teeth whitening services.  The Board claimed that the non-dentists were engaged in the unlicensed practice of dentistry.  The FTC, however, claimed that the Board was seeking to protect its members (licensed dentists who performed teeth whitening services) from competition from non-dentists charging lower prices.

The issue on appeal to the Supreme Court was whether the Board enjoyed state action immunity under Parker v. Brown, 317 U.S. 341 (1943), given that the Board was created by and designated as a "agency of the State" under North Carolina law.

The Court explained that "while the Sherman Act confers immunity on the State's own anticompetitive policies out of respect for federalism, it does not always confer immunity where, as here, the State delegates control over a market to a nonsovereign actor."  Although the Board was designated as a state agency under North Carolin law, "[s]tate agencies are not simply by their governmental character sovereign actors for purposes of state action immunity...  Immunity for state agencies, therefore, requires more than a mere facade of state involvement..." 

In this case, the Court was concerned that the Board was controlled by active market participants with a financial interest in the regulation at issue.  (Indeed, the Court noted that 8 out of the 10 Board members earned substantial fees from teeth whitening services.)

The Court explained:

Limits on state-action immunity are most essential when the State seeks to delegate its regulatory power to active market participants, for established ethical standards may blend with private anticompetitive motives in a way difficult even for market participants to discern...  In consequence, active market participants cannot be allowed to regulate their own markets free from antitrust accountability.

Thus, the Court held that state agencies that are controlled by active market participants must meet the two-pronged test set forth in California Retail Liquor Dealers Ass'n v. Midcal Aluminum Inc., 445 U.S. 97 (1980), to be afforded state action immunity.  That test had been created by the Supreme Court to determine whether a private trade association (wine merchants who were delegated price fixing authority under California law) was entitled to state action immunity.  The Midcal test requires that the State (1) articulate a clear policy to allow anticompetitive conduct and (2) provide "active supervision" of the anticompetitive conduct.

Today, the Court held that this "active supervision test is an essential prerequisite of Parker immunity for any nonsovereign entity -- public or private -- controlled by active market participants."  The Court stated:

State agencies controlled by active market participants, who possess singularly strong private interests, pose the very risk of self-dealing Midcal's supervision requirement was created to address...  This conclusion does not question the good faith of state officers but rather is an assessment of the structural risk of market participants' confusing their own interests with the State's policy goals.

In other words, the Court recognized that "specialized boards dominated by active market participants" are "more similar to private trade associations vested by States with regulatory authority," than to the more typical state agencies previously afforded state action immunity.  "When a State empowers a group of active market participants to decide who can participate in its market, and on what terms, the need for supervision is manifest."

Since the Board did not contend that its conduct was actively supervised by the State of North Carolina, the Board was therefore not entitled to Parker immunity.

The dissenting opinion (authored by Justice Alito and joined by Justices Scalia and Thomas) argued that the majority's ruling was an "unprecedented step" that would "create practical problems and have far reaching effects on the States' regulation of professions."  The dissent pointed out that state medical and dental boards are typically staffed by practitioners, and that there is nothing new about the suspicion that such boards were acting out of the interests of their members and not the public.  "As a result of today's decision, States may find it necessary to change the composition of medical, dental and other boards, but it is not clear what sort of changes are needed to satisfy the test that the Court now adopts." 

Among the questions raised by the dissent were:

• What does it mean that a state agency is controlled by active market participants?  
• What is a controlling number?  
• Can something less than a majority suffice? 
• Who is an active market participant?  
• What is the scope of the market being analyzed?  
• Must the market be relevant to the particular regulation being challenged?  
• How much participation makes a person active?

The answers to these questions may eventually be worked out by lower courts or the FTC.  It will be interesting to see whether and how States change the makeup of professional boards or adopt new procedures to ensure that the actions of such boards are "actively supervised" by a non-market participant. 

In the meantime, I expect there will be an increase in the number of cases challenging alleged protectionist activity by state professional boards.

The Supreme Court's decision is available here:

North Carolina State Board of Dental Examiners v. Federal Trade Commission

Supreme Court Decision May Lead to More False Advertising Claims in Food and Beverage Industry

The Supreme Court's ruling in Pom Wonderful LLC v. Coca-Cola Co. may open the door to more false advertising claims regarding food and beverage labeling.

The Lanham Act permits one competitor to sue another for unfair competition arising from false or misleading product descriptions.  The FDA also regulates food and drink labeling in a myriad of labeling requirements and standards authorized by the Federal Food, Drug and Cosmetic Act ("FDCA").  Competitors, however, are not allowed to bring claims to enforce the FDCA standards.

In the recent case before the Supreme Court, POM Wonderful LLC, which sells a pomegranate-blueberry juice blend, filed a lawsuit against Coca-Cola, alleging that the name and label of one of Coca-Cola's juice blends mislead consumers into believing the product consists predominantly of pomegranate and blueberry juice when it actually consisted mostly of apple and grape juice.  Coca-Cola argued that the lawsuit was barred because its label complied with FDCA standards.  The FDCA distinguishes between a product's label and ingredients.  The Supreme Court, however, ruled that the false advertising claim could continue under the Lanham Act because "Congress did not intend FDA oversight to be the exclusive means of ensuring proper food and beverage labeling."  The Court explained: "The FDCA's enforcement is largely committed to the FDA, while the Lanham Act empowers private parties to sue competitors to protect their interests on a case-by-case basis. Allowing Lanham Act suits takes advantage of synergies among multiple methods of regulation."  The case will be remanded to trial court for a decision on the merits.

You can read more about the Court's ruling here and here.

Supreme Court Creates New Standing Test For Asserting False Action Claim Under Lanham Act

On March 25, 2014, the Supreme Court issued a unanimous opinion, authored by Justice Scalia, in Lexmark International, Inc. v. Static Control Components, Inc.  In a previous post, I discussed my involvement in this case at the trial court level.

Supreme Court Justice Scalia

The case involves the standing requirements for asserting a claim for false advertising under the Lanham Act.  There was an existing split among the regional circuits, with some courts limiting standing to direct competitors, other courts adopting the standing analysis from antitrust cases, and other courts applying a broader "reasonable interest" test.  The Supreme Court, however, rejected all of these standards and created a new "zone of interests" test, explaining:

While none of those tests is wholly without merit, we decline to adopt any of them. We hold instead that a direct application of the zone-of-interests test and the proximate-cause requirement supplies the relevant limits on who may sue.

The "zone of interests" test originates from cases interpreting standing to seek judicial review under the Administrate Procedures Act.  The Court, however, held that this test also applies to other statutorily created causes of action, like the Lanham Act.  The Court further stated:

We thus hold that to come within the zone of interests in a suit for false advertising under §1125(a), a plaintiff must allege an injury to a commercial interest in reputation or sales. A consumer who is hoodwinked into purchasing a disappointing product may well have an injury-in-fact cognizable under Article III, but he cannot invoke the protection of the Lanham Act—a conclusion reached by every Circuit to consider the question....  Even a business misled by a supplier into purchasing an inferior product is, like consumers generally,not under the Act’s aegis.

With respect to the proximate cause analysis, the Court held:

that a plaintiff suing under §1125(a) ordinarily must show economic or reputational injury flowing directly from the deception wrought by the defendant’s advertising; and that that occurs when deception of consumers causes them to withhold trade from the plaintiff.

The Court's new "zone of interests" test appears to be broader than some of the tests used by lower courts but more narrow that others.

In reaching its decision, the Supreme Court critiqued the various multifaceted tests that lower courts previously had used, noting that these "open-ended balancing tests can yield unpredictable and at times arbitrary results."  It will be interesting to watch if this decision leads to broader changes in the standing requirements for other statutory causes of action.

For example, the traditional standing test for antitrust claims was one of the "open-ended balancing tests" that the Court critiqued.  Does this case forecast a change to standing principles under antitrust law?

Supreme Court to Decide Requirements for Standing under Lanham Act

In the coming weeks, the Supreme Court will decide a case involving the proper framework for determining standing to maintain an action for false advertising under the Lanham Act.  The case, Lexmark International, Inc. v. Static Control Components, has a long history, in which I played a role nearly eight years ago.  In fact, I believe that I drafted the motion to dismiss that is the subject of this appeal.

The District Court granted that motion, in September 2006, dismissing the antitrust and false advertising counterclaims for lack of standing based on the factors set forth in Associated Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters.  After that decision, in 2007, there was a trial on the remaining claims, which resulted in a number of lengthy appeals.  In one of those appeals, on October 26, 2012, the Sixth Circuit reversed the District Court's ruling as to standing after finding that that the Associated General factors were not the proper analysis for a Lanham Act claim.

This decision added to an existing circuit split on the proper analytical framework.  The Third, Fifth, Eighth and Eleventh Circuits have adopted the Associated General factors; the Seventh, Ninth and Tenth Circuits have adopted a categorical test permitting suits only by an actual competitor; and the Sixth and Second Circuits have applied a more expansive "reasonable interest" test.

It is rather unusual for the Supreme Court to review a district court decision from way back in 2006.  I imagine that at the time the district court initially ruled on this issue, many of the cases that are now being cited and relied upon by both parties had not yet been decided.  It is also odd, on a personal level, to remember back eight years ago (before I had any children!) when I drafted that initial motion to dismiss.