Supreme Court Hears Oral Argument in Antitrust Class Action Against Comcast

This posting was written by Jeffrey May, Editor of Trade Regulation Reporter.

As the U.S. Supreme Court heard oral argument on November 5 about the appropriate standard for class certification in a consumer antitrust action against cable provider Comcast Corporation, the justices spent much of the time trying to determine whether the parties actually had opposing views on the appropriate legal standard (Comcast Corp. v. Behrend, Dkt. 11-864).

The case could impact the ability of consumers to pursue damages class actions if the Court were to impose tougher standards on lower courts as they consider motions for class certification.

“[I]t seems to me that except for the question of how good the expert report is, none of the parties have any adversarial difference as to the appropriate legal standard,” commented Justice Elena Kagan. “And, you know, usually we decide cases based on disagreements about law, and here I can't find one.”

In deciding to take up the case, the U.S. Supreme Court “wanted to talk about . . . whether a district court at a class certification stage has to conduct a Daubert inquiry, in other words, [whether it] has to decide on the admissibility of expert testimony relating to class-wide damages,” according to Justice Kagan. Comcast's counsel had argued that the complaining cable customers’ damages model no longer fit the legal theory that remained in the case.

In June 2012, the Supreme Court agreed to review a decision of the U.S. Court of Appeals in Philadelphia (655 F.3d 182, 2011-2 Trade Cases ¶77,575), upholding the certification of a class of approximately two million cable television customers in the Philadelphia area. The customers allege that Comcast engaged in unlawful monopolization.

The appellate court ruled that the lower court satisfied the “rigorous analysis” standard established by the Third Circuit in In re Hydrogen Peroxide Antitrust Litigation (552 F.3d 305, 2008-2 Trade Cases ¶76,453) in determining that questions of fact or law common to class members predominated over individual issues, for purposes of meeting the certification requirements of Federal Rule of Civil Procedure 23(b)(3).

In its petition, Comcast asked whether a district court may certify a class action without resolving “merits arguments” that bear on prerequisites for certification under Rule 23, including whether purportedly common issues predominate over individual ones under Rule 23(b)(3).

In granting certiorari, the Court limited its review to the question: “Whether a district court may certify a class action without resolving whether the plaintiff class has introduced admissible evidence, including expert testimony, to show that the case is susceptible to awarding damages on a class-wide basis.”

There was some question as to whether Comcast waived its right to object to the admissibility of the expert testimony. Comcast's counsel asserted that Comcast had never said that its objection was only to the weight and not to the admissibility of the evidence.

Counsel for the customers contended that Comcast was so profoundly uninterested in Daubert, and was so focused on arguing weight and probativeness as opposed to admissibility, that it never even cited the case at the district court level. The Supreme Court's 1993 decision in Daubert v. Merrell Dow Pharmaceuticals, Inc. (509 U. S. 579), sets out certain requirements for the admission of expert testimony.

Chief Justice John Roberts suggested that the Court should answer the question presented as reformulated and send it back down to the district court to determine whether or not the parties adequately preserved the objection or not. “[T]he district court presumably can decide based on the proceedings and all that below, all the scars and mess-ups, whether or not it was adequately preserved or not,” he noted.

High Court to Rule on Exception to Driver's Privacy Law

This posting was written by Thomas A. Long, Editor of CCH Privacy Law in Marketing.

The U.S. Supreme Court on September 25 agreed to hear a case that could clarify what uses of personal information obtained from driver's license and vehicle registration databases are "permissible" under the federal Driver's Privacy Protection Act ("DPPA"), 18 U.S.C. §§2721-2725. The DPPA regulates the disclosure of personal information contained in the records of state motor vehicle departments. The DPPA permits the disclosure of protected personal information for several "permissible uses" listed in §2721(b).

The Court granted a petition for certiorari filed by individuals asking the Court to review a decision of the U.S. Court of Appeals in Richmond (CCH Privacy Law in Marketing ¶60,751), holding that four attorneys who obtained motor vehicle records of South Carolina vehicle buyers for the purpose of engaging in mass solicitation without consent-a purpose prohibited by the DPPA-could not be liable for violating the DPPA, as a matter of law. According to the appellate court, the attorneys made permissible use of the buyers' personal information protected by the DPPA, specifically, use in connection with litigation, including investigation in anticipation of litigation, and the solicitation was conducted in the course of that permissible use.

The attorneys had sent several FOIA requests to the South Carolina Department of Motor Vehicles seeking information regarding individuals who purchased automobiles during specific periods of time, including the name, address, and telephone number of the buyer; the dealership where the automobile was purchased; the type of vehicle purchased; and the date of the purchase. The attorneys then mailed a letter to the individuals whose information was obtained, offering a free consultation and inviting the individuals to hire the attorneys to represent them in a lawsuit against certain dealerships. The letter included the label "ADVERTISING MATERIAL."

The DPPA provides that a state DMV may disclose personal information for use in connection with an investigation in anticipation of litigation. It was a matter of settled state law and practice that solicitation was an accepted, expected, and inextricably intertwined element of conduct satisfying the litigation exception under the DPPA, the Fourth Circuit said. Accordingly, such solicitation was not actionable by the buyers. Dismissal of the buyers' DPPA claims by the federal district court in Greenville, South Carolina, was affirmed.

The petition is Maracich v. Spears, 12-25.

Supreme Court to Consider State Action, Class Certification Next Term

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

On the last day of the October 2011 term, the U.S. Supreme Court granted petitions for certiorari in two closely-watched antitrust cases: (1) a Federal Trade Commission (FTC) action challenging a Georgia hospital combination, and (2) a consumer class action against cable provider Comcast Corporation.

State Action Doctrine

In the FTC action, the Court will consider the scope of the state action doctrine. At the request of the FTC, the U.S. Solicitor General in March petitioned the Court to review a decision of the U.S. Court of Appeals in Atlanta (2011-2 Trade Cases ¶77,722, 663 F.3d 1369), holding that the proposed combination of the only two hospitals in Albany, Georgia, was immune from antitrust attack under doctrine. The appellate court had upheld dismissal (2011-1 Trade Cases ¶77,508, 793 F. Supp. 2d 1356) of the Commission’s complaint for injunctive relief pending the completion of an administrative proceeding.

In April 2011, the FTC issued an administrative complaint challenging the transaction (CCH Trade Regulation Reporter ¶16,588). The FTC alleged that a local hospital authority’s purchase of Palmyra Park Hospital’s assets from HCA, Inc. and subsequent lease to Phoebe Putney Health System, Inc. (PPHS)—the operator of Phoebe Putney Memorial Hospital—would substantially lessen competition or tend to create a monopoly in the inpatient general acute-care hospital services market in Georgia’s Dougherty County and surrounding areas. The agency also sought injunctive relief to prevent the consummation of the plan prior to the completion of the administrative proceeding. Pending conclusion of the court action, the FTC stayed its administrative proceedings (CCH Trade Regulation Reporter ¶16,620).

In its petition for certiorari, the government asked the Court to consider:

(1) whether the Georgia legislature, by vesting the local government entity with general corporate powers to acquire and lease out hospitals and other property, has “clearly articulated and affirmatively expressed” a “state policy to displace competition” in the market for hospital services; and

(2) whether such a state policy, even if clearly articulated, would be sufficient to validate the alleged anticompetitive conduct, given that the local government entity neither actively participated in negotiating the terms of the hospital sale nor had any practical means of overseeing the hospital’s operation.

According to the petition, the case presents the question of whether a hospital’s acquisition of its only rival, effectuated by using a substate governmental entity’s general corporate powers, is exempt from antitrust scrutiny under the “state action doctrine.” The appellate court decision conflicts with decisions of the Fifth, Sixth, Ninth, and Tenth Circuits, the agency contends.

The petition for review, FTC v. Phoebe Putney Health System, Inc., Dkt. 11-1160, was granted on June 25, 2012.

Class Action Certification

The Court has also decided to consider a decision of the U.S. Court of Appeals in Philadelphia (2011-2 Trade Cases ¶77,575, 655 F.3d 182), upholding the certification of a class of approximately two million cable television customers in the Philadelphia area. The customers allege that Comcast engaged in monopolization, attempted monopolization, and market or customer allocation through a series of acquisitions and cable system swap arrangements.

The appellate court ruled that the lower court satisfied the “rigorous analysis” standard established in In re Hydrogen Peroxide Antitrust Litigation (2008-2 Trade Cases ¶76,453, 552 F.3d 305) in determining that questions of fact or law common to class members predominated over individual issues, for purposes of meeting the certification requirements of Federal Rule of Civil Procedure 23(b)(3).

The High Court may see things differently.

Comcast petitioned the Court for review in January. Comcast argued that the “Third Circuit’s view that ‘merits arguments’ are ‘not properly before [the court]’ at the class certification stage . . . cannot be reconciled with this Court’s decision in [Walmart Stores, Inc. v. ] Dukes and breaks sharply with the Eighth and Ninth Circuits, which have correctly recognized that such limitations on review of ‘merits’ issues at the certification stage are no longer supportable after Dukes.”

In its petition, Comcast asked: whether a district court may certify a class action without resolving “merits arguments” that bear on prerequisites for certification under Federal Rule of Civil Procedure 23, including whether purportedly common issues predominate over individual ones under Rule 23(b)(3).

In granting certiorari, the Court limited its review to the question: “whether a district court may certify a class action without resolving whether the plaintiff class has introduced admissible evidence, including expert testimony, to show that the case is susceptible to awarding damages on a class-wide basis.”

The petition for review, Comcast Corp. v. Behrend, Dkt. 11-864, was granted on June 25, 2012.

FTC Will Not Seek Review in Lundbeck Case

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

The FTC will not petition the U.S. Supreme Court for review of a decision of the U.S. Court of Appeals in St. Louis (2011-2 Trade Cases ¶77,570), rejecting a challenge to a 2006 acquisition involving global pharmaceutical company Lundbeck, Inc.

The appellate court affirmed judgment in favor of the drug company (2010-2 Trade Cases ¶77,160), based on the government’s failure to identify a valid relevant product market.

Decision “Profoundly Wrong”

The decision was made not to pursue review, despite a determination that the result in the case “was profoundly wrong, reflecting a serious misunderstanding by the District Court of the dynamics of this market and of the competitive consequences of an acquisition that allowed one company to control the only two pharmaceutical treatments for a life-threatening medical condition and raise prices by nearly 1300 percent,” according to a statement expressing the views of Chairman Jon Leibowitz, Commissioner Edith Ramirez, and Commissioner Julie Brill.

The three commissioners decided that it would be better to “turn our energies to other enforcement priorities.”

Commissioner Rosch’s Views

In a separate statement, Commissioner J. Thomas Rosch outlined the “many reasons for seeking Supreme Court review of the Eighth Circuit’s panel and en banc decisions in the Lundbeck case, which blessed the district court’s decision.”

According to Rosch, the courts erred in determining the product market. The first error of law was that, in holding that the two drugs at issue in the case—Indocin and NeoProfen—did not compete with each other in the same relevant product market, the district and appellate courts interpreted “cross-elasticity of demand” to mean exclusively cross-price elasticity of demand. Second, by erroneously focusing only on cross-price elasticity of demand, the district court allowed an economic expert’s opinion to trump the record facts regarding how the products were being marketed, purchased, and used in the real world.

Rosch also questioned the district court’s failure to consider the parties’ own business documents, as well as a hypothetical market.

The statement on the closing of the investigation of Lundbeck, Inc., Dkt Nos. 10-3458, 10-3459, FTC No. 0810156, appears at CCH Trade Regulation Reporter ¶16,711.

High Court Declines to Review Iowa’s Taxation of Franchisor With No Physical Presence In State

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

A national franchisor of fried chicken restaurants has been denied U.S. Supreme Court review of a decision by the Iowa Supreme Court, rejecting the franchisor’s argument that a physical presence within the State of Iowa was a prerequisite to the state’s imposition of income tax on the franchisor (KFC Corp. v. Iowa Department of Revenue, Business Franchise Guide ¶14,518).

Specifically, the Iowa court held that a physical presence was not required under the dormant Commerce Clause of the U.S. Constitution in order for the Iowa legislature to impose an income tax upon revenue earned by an out-of-state restaurant franchisor arising from the use of the franchisor’s intangibles by franchisees located within the state.

By licensing franchises within Iowa, the franchisor received the benefit of an orderly society within the state and, as a result, was subject to the payment of income taxes that otherwise met the requirements of the dormant Commerce Clause.

Background

The dispute began when the Iowa Department of Revenue issued the franchisor an assessment in the amount of $284,658 for unpaid corporate income taxes, penalties, and interest for 1997, 1998, and 1999. The franchisor, a Delaware corporation with its principal place of business in Kentucky, owned no restaurant properties in Iowa and had no employees in Iowa.

All of the franchisor’s franchisees in Iowa were independent businesses that licensed their use of the franchisor’s trademark and related system.

The franchisor protested the assessment of the income tax, arguing that, in Quill Corp. v. North Dakota (504 U.S. 298, 1992), the U.S. Supreme Court held that a use tax could not be imposed on a foreign corporation that had no physical contact with the taxing state. Further, the Quill Court did not limit its holding to use taxes, the franchisor pointed out.

Opinion Below

This situation differed from Quill, where the only presence in the state except for "title to a few floppy diskettes" resulted from the use of U.S. and common carriers, because this case involved the use of the franchisor’s intangible property in the state to produce royalty income, according to the Iowa court.

Forced to predict whether the U.S. Supreme Court would extend the physical presence requirement imposed by Quill on use taxation to prevent a state from imposing an income tax based on revenue generated from the use of intangibles within the taxing jurisdiction, the Iowa Supreme Court held that it would not.

Physical Presence Test

The use of a physical presence test limited the power of a state to tax out-of-state taxpayers, but it did so in an irrational way, according to the court. In today’s world, physical presence was not a meaningful surrogate for the economic presence sufficient to make a seller the subject of state taxation. Instead, physical presence often reflected more the manner in which a company did business rather than the degree to which the company benefited from the provision of government services in the taxing state.

Extension of the physical presence approach of Quill would be an incentive for entity isolation in which potentially liable taxpayers could create wholly-owned affiliates without physical presence in order to defeat potential tax liability, the court reasoned.
The court doubted that the U.S. Supreme Court would want to extend such form-over-substance activity into the income tax arena where "substance over form has been the traditional battle cry."

Moreover, Iowa’s taxation of the franchisor’s royalty income was most consistent with the prevailing substance-over-form approach embraced in most of the modern cases decided by the Supreme Court under the dormant Commerce Clause, according to the court.

Petition for Review

The franchisor contended that review was warranted because of the acknowledged division among the states over whether a state may impose taxes other than sales or use taxes on an out-of-state business with no physical ties to the state. With the decision below, 16 state appellate courts have divided over whether the physical presence requirement in Quill applied to state income and franchise taxes.

The courts of three states concluded that that a taxing state could not impose an income or franchise tax on an out-of-state business unless it maintained a physical presence in the taxing state, and the courts of the remaining 13 states reached a different conclusion, the franchisor noted. The conflict among the states was “entrenched” and would not be resolved absent review by the Supreme Court.

The franchisor also attacked the merits of the Iowa court’s ruling, arguing that the U.S. Supreme Court has never sustained a state tax in the absence of an in-state physical presence by the taxpayer. Underpinning the Iowa court’s ruling was the idea that the Commerce Clause treated sales and use taxes differently than income and franchise taxes. However, the Supreme Court had never drawn such a distinction, according to the franchisor, and had long held that there be a substantial nexus between a state and an out-of state business before any tax could be levied.

In fact, no decision of the U.S. Supreme Court had ever sustained a state tax imposed on an out-of-state business that had no in-state presence in the taxing state. It was only the Iowa court below, along with 12 other state courts, that had reached a contrary conclusion.

The franchisor further argued that continued state court repudiation of the physical presence requirement adversely affected the entire United States economy and had international implications. The issue at stake was estimated to be worth billions of dollars annually in taxes and would be left to a patchwork of state courts to decide until the High Court “provided a uniform understanding of the scope of the Commerce Clause.”

Until the U.S. Supreme Court reviews the issue, a foreign business with no physical presence in the U.S. could be subject to state taxation, even though the foreign business was exempted from federal income taxes by tax treaties that normally required a physical presence in the country.

The petition in KFC Corp. v. Iowa Dept. of Revenue, Dkt. No. 10-1340, was denied by the Supreme Court on October 3, 2011.

Further details regarding the Iowa Supreme Court decision appear in a January 4, 2011 Trade Regulation Talk posting (“Iowa May Tax Royalties to Out-of-State Franchisor Having No Physical Presence in State”).

U.S. Urges High Court Not to Review Decision Enforcing Subpoenas in Antitrust Investigation

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

The U.S. Supreme Court should not review a decision of the U.S. Court of Appeals in San Francisco (CCH 2011-1 Trade Cases 77,467) enforcing grand jury subpoenas served on law firms in an antitrust investigation, the Department of Justice contended in a May 26 brief filed with the Court. The subpoenas sought non-privileged, pre-existing corporate records of the law firms’ clients.

The law firms had petitioned the Court to review the appellate court's decision, applying a per se rule enforcing a grand jury subpoena notwithstanding a civil protective order, and allowing prosecutors to obtain discovery materials from a parallel civil action, regardless of any countervailing considerations.

The underlying civil suits were filed by private plaintiffs against the law firms' clients—foreign producers of thin-film transistor-liquid crystal display panels (TFT-LCD)—soon after the government's investigation into alleged price fixing in the TFT-LCD industry became public.

The private litigation resulted in the production by the civil defendants of documents originating outside the United States. The Department of Justice served grand jury subpoenas on four law firms, seeking foreign-origin documents and deposition transcriptsfrom the class actions. A federal district court quashed certain subpoenas, and the Justice Department appealed.

“By a chance of litigation, the documents have been moved from outside the grasp of the grand jury to within its grasp,” the appellate court explained. “No authority forbids the government from closing its grip on what lies within the jurisdiction of the grand jury.”

The appellate court noted that the government had not engaged in any bad faith tactics, and the law firms did not claim that the documents were privileged. The per se rule of enforcement of grand jury subpoenas applied.

In response to the law firms' contention that review of the appellate court decision would resolve a split among the federal circuit courts on the issue of grand jury subpoena enforcement, the government argued that “no other court of appeals would have decided this case differently.”

The government conceded that “the circuits have adopted somewhat different positions on when grand jury subpoenas may be used to obtain materials covered by a civil protective order.” However, it noted that the law firms “significantly overstate the difference between the rule applied in the Fourth, Ninth, and Eleventh Circuits (which petitioners characterize as a “per se” approach) and the rule applied by the First and Third Circuits, which apply a rebuttable presumption that a grand jury subpoena should be enforced even when there is a civil protective order.”

The government also suggested that review was unnecessary because the question of how and when grand jury subpoenas can require production of material covered by civil protective orders rarely arises.

In addition, the government took issue with one law firm's argument that the subpoenas were unreasonable or oppressive because they were directed to lawyers. There was no risk posed to the attorney-client relationship, according to the government's brief. The subpoenas sought information that was produced in discovery, not information bearing on the representation of a client.

The petitions are White & Case LLP v. U.S., Dkt. No. 10-1147, filed February 25, 2011, and Nossaman LLP, v. U.S., Dkt. No. 10-1176, filed March 4, 2011