Former Executives Convicted for Participating in Municipal Bond Conspiracy

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

Three former executives of General Electric Co. (GE) affiliates were convicted by a federal jury in New York City on May 11 for their participation in conspiracies related to bidding for contracts for the investment of municipal bond proceeds and other municipal finance contracts. The trial against the three began on April 16.

An initial 12-count indictment was filed in July 2010, charging the former executives with participating in wire fraud schemes and separate fraud conspiracies at various time periods from as early as 1999 until 2006. A seven-count superseding indictment followed in May 2011.

The three former financial services executives participated in separate fraud conspiracies with various financial institutions and insurance companies and their representatives, according to the Justice Department. These institutions and companies, or “providers,” offered a type of contract, known as an investment agreement, to state, county and local governments and agencies throughout the United States.

The public entities were seeking to invest money from a variety of sources, primarily the proceeds of municipal bonds that they had issued to raise money for, among other things, public projects. One of the three defendants also participated in the conspiracies while employed at Financial Security Assurance Capital Management Services LLC.

According to evidence presented at trial, the conspirators corrupted the bidding process for dozens of investment agreements to increase the number and profitability of investment agreements awarded to the provider companies where they were employed.

The three defendants deprived the municipalities of competitive interest rates for the investment of tax-exempt bond proceeds that were to be used by municipalities for various public works projects, such as for building or repairing schools, hospitals and roads. Evidence at trial established that they cost municipalities around the country millions of dollars.

According to the Department of Justice, a total of eighteen individuals have been charged as a result of the ongoing municipal bonds investigation. Including these convictions, a total of 15 individuals have been convicted and three await trial. Additionally, one company has pleaded guilty.

“The defendants corrupted the competitive bidding process and defrauded municipalities across the country for years,” said Deputy Assistant Attorney General Scott D. Hammond of the Department of Justice Antitrust Division, in response to the verdict. “Through corruption and fraud, they cheated cities and towns out of money for important public works projects. Today’s convictions reflect our determination to preserve fairness and competition in the financial services market.”

The case is United States v. Dominick P. Carollo, No. 10 CR 654 (SD N.Y.). A news release appears here on the Antitrust Division website.

Magazine Wholesaler Plausibly Alleged Boycott

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

The federal district court in New York City should not have rejected allegations that a magazine wholesaler was driven out of business as a result of an antitrust conspiracy, the U.S. Court of Appeals in New York City has decided. The appellate court vacated the lower court’s judgment granting a motion to dismiss the wholesaler’s Sherman Act Sec. 1 claim for failure to state a claim and denying leave to file an amended complaint.

According to the appellate court, the lower court misapplied the plausibility standards set by Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 2007-1 Trade Cases ¶75,709, and Ashcroft v. Iqbal, 129 S. Ct. 1937, 2009-2 Trade Cases ¶76,785.

The lower court should not have dismissed plausible allegations of a boycott, merely because it found a different version of events more plausible. By finding the plaintiff’s view of the events implausible, or less plausible than the possibility that the defendants acted unilaterally, the lower court improperly made factual findings, it was held.

Prior to being forced into bankruptcy liquidation, Anderson News was the second largest magazine wholesaler in the United States. After ceasing operations in 2009, Anderson brought an antitrust action against five national magazine publishers and their four distribution representatives, as well as two smaller wholesalers. Anderson alleged that, along with the country’s largest magazine wholesaler—Source Interlink Distribution, LLC—it was the target of a boycott.

Anderson contended that the boycott to eliminate the nation’s two largest magazine wholesalers followed a move by Anderson to impose a surcharge on publishers for each magazine copy it distributed, regardless of whether the copy was sold by a retailer. The surcharge was an attempt to recover costs associated with retrieving unsold magazine copies from retailers and disposing of them. Shortly after Anderson announced the surcharge, Source announced that it too would impose a similar surcharge.

The defendants, in an effort to get Anderson to drop the surcharge, allegedly invited the wholesaler to join in the elimination of Source, but Anderson declined. According to Anderson, thereafter, the defendants met or communicated with each other and agreed to reject Anderson’s proposed surcharge, to refuse any other accommodation, and to stop supplying Anderson with magazines.

Anderson’s allegations of conspiracy were plausible, in the appellate court’s view. The appellate court explained what differentiated the complaint filed by Anderson from the complaint at issue in Twombly.

Anderson alleged an actual agreement to eliminate Anderson and/or Source as wholesalers in the market and to divide the market between two smaller wholesalers. According to the appellate court, “the facts alleged in the [proposed amended complaint] are sufficient to suggest that the cessation of shipments to Anderson resulted … from a lattice-work of horizontal and vertical agreements to boycott Anderson.”

The appellate court went on to say that it had “difficulties with some of the court’s analytical constructs, including its application of Twombly’s plausibility test.” The lower court’s plausibility inquiry was “misdirected” when it ruled that Anderson did not state a plausible Sherman Act, Sec. 1 claim, simply because unilateral parallel conduct by the defendants was completely plausible.

According to the appellate court, “although an innocuous interpretation of the defendants’ conduct may be plausible, that does not mean that the plaintiff’s allegation that that conduct was culpable is not also plausible.” Moreover, on a Rule 12(b)(6) motion it was “not the province of the court to dismiss the complaint on the basis of the court’s choice among plausible alternatives.”

The appellate court also rejected the lower court’s determinations that Anderson’s conspiracy claim was implausible because the defendants had “a variety of reactions” to Anderson’s announcement of the surcharge or because Anderson’s surcharge was a nonnegotiable demand on the publishers. There was nothing implausible about coconspirators’ starting out in disagreement as to how to deal conspiratorially with their common problem.

Moreover, the presentation of a common economic offer might lend itself to independent, parallel responses, but it did not provide antitrust immunity to the publishers if they decided to get together to boycott the offeror.

The decision is Anderson News, LLC v. American Media, Inc., 2012-1 Trade Cases ¶77,843.

Night Clubs Allege Antitrust Claims Against Online Music Marketplace, Competing Club

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

Antitrust claims against “Beatport”—an online marketplace that catered to consumers and producers of “Electronic Dance Music”—and a related “Beta” nightclub were adequately alleged, the federal district court in Denver has ruled. Thus, a motion to dismiss claims brought by a group of commonly-owned night clubs comprising Denver’s South of Colfax Nightlife district (SOCO) was denied. The claims of the owner of the complaining clubs were, however, dismissed because the owner lacked standing to pursue the claims individually.

Two of the SOCO night clubs were nationally recognized in the Electronic Dance Music scene. They emphasized Electronic Dance Music and live performance by DJs. The clubs alleged that the defendants engaged in anticompetitve conduct to coerce DJs to boycott the SOCO venues and only perform at Beta.

The court refused to dismiss the SOCO clubs’ claim that Beatport and Beta coerced DJs into performing only at Beta by threatening to remove artists on a DJ’s label from Beatport if they performed at the SOCO clubs. Because access and promotion on Beatport were critical to both a DJ’s and a label’s success, many DJs and agents were allegedly compelled to agree to the defendants’ demands. The complaining clubs alleged that the defendants had sufficient market power in the market for Electronic Dance Music downloads to adversely effect competition for live performances of "A-list" DJs.

Standing

The complaining clubs asserted that they possessed standing to bring antitrust claims by virtue of their status as competitors who were foreclosed from the market for live performance of A-list DJs. The two SOCO clubs that emphasized Electronic Dance Music and live DJ performance alleged antitrust injuries of lost past and future profits, decreased ability to compete, and decreased value of real property.

Additional evidence and facts would be needed to prove harm to the other SOCO nightclubs as the case proceeded, the court noted. However, there were sufficient facts to support the clubs’ antitrust standing for purposes of a motion to dismiss. The owner of the SOCO clubs failed to support a claim that he suffered an injury separate from the injury sustained by the SOCO clubs based on an injury to his reputation or devaluation of real property of the clubs, the court ruled.

Attempted Monopolization

The clubs adequately alleged an attempted monopolization claim against Beta, which controlled more than half the market for live performance by A-list DJs in the Denver metropolitan area. There was a dangerous probability that Beta could achieve monopoly power in the market for A-list DJ performances.

The complaining clubs pled a specific intent to monopolize by stating that Beta and its owner engaged in predatory and anticompetitive conduct, including illegal tying, exclusive dealing, reciprocal dealing, monopoly leveraging, market allocation, group boycott and the concerted combination of these actions.

Conspiracy

Conspiracy claims were not dismissed, despite the defendants’ assertions that, as related entities, they were incapable of conspiring. Although some common ownership existed between Beta and Beatport, it was not sufficient to warrant dismissal under Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 1984-2 Trade Cases ¶66,065, which held that wholly owned subsidiaries were incapable of conspiring. Further, a defending part-owner of Beta had an “independent personal stake” in restraint of trade of the club’s competitors.

The March 14 opinion is Christou v. Beatport, LLC, 2012-1 Trade Cases ¶77,829.

No Exception to PSLRA Bar for Aiding and Abetting Claims in RICO Case

This posting was written by Mark Engstrom, Editor of CCH RICO Business Disputes Guide.

The Private Securities Litigation Reform Act (PSLRA) barred a RICO conspiracy claim against two financial services companies that allegedly aided and abetted a Ponzi scheme that was perpetrated by former hedge fund manager Bernie Madoff, the U.S. Court of Appeals in New York City ruled earlier this month. The ruling settled a conflict among district courts in the Second Circuit regarding the scope of the PSLRA’s bar on civil RICO claims.

Exceptions

The PSLRA prohibited private plaintiffs from pursuing RICO claims that were predicated on conduct that was actionable as fraud in the purchase or sale of securities. The issue in this case was whether an exception to the bar existed when an injured plaintiff lacked a cause of action sounding in securities fraud (in this case, because the plaintiff alleged only an aiding and abetting claim, which could not serve as the basis for a private right of action). When Congress stated that “no person” could bring a civil RICO action for conduct that would have been actionable as securities fraud, it did not mean “no person except one who has no other actionable securities fraud claim,” the court explained. Moreover, the legislative history of the PSLRA supported this reading.

Legislative History

The Conference Committee Report for the relevant PSLRA provision stated that Congress intended the provision to “eliminate securities fraud as a predicate offense in a civil RICO action,” and bar a plaintiff from “plead[ing] other specified offenses, such as mail or wire fraud, as predicate acts under civil RICO if such offenses are based on conduct that would have been actionable as securities fraud.” Congress was aware that the RICO amendment would place some claims—such as those for aiding and abetting securities laws violations—outside the reach of private civil RICO suits. It appeared, however, that the Senate was satisfied that the securities laws would “generally provide adequate remedies for those injured by securities fraud,” according to the court.

Finally, the Third, Fifth, Ninth, and Tenth Circuits each came to a similar conclusion, even though those courts were not presented with the same circumstances (aiding and abetting) that existed in this case.

The July 7, 2011, decision in MLSMK Invest. Co. v. JP Morgan Chase & Co. (2nd Cir.) will appear at CCH RICO Business Disputes Guide ¶12,069.

Youth Hockey League’s Exclusive Participation Rule Could Be Anticompetitive

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

A for-profit youth hockey program adequately alleged monopolization and attempted monopolization claims against a local district of USA Hockey, the national governing board for amateur hockey, the federal district court in Minneapolis has ruled.

The complaining youth program challenged the local district's adoption of an "outside league rule," which prohibited players from participating in competing hockey leagues. The local district's motion to dismiss the monopoly claims was denied; however, the court rejected conspiracy claims.

Monopoly

The complaining program pled sufficient facts to state facially plausible monopoly claims that the defendants engaged in anticompetitive behavior under either an actual exclusion or market power test, according to the court.

The complaining program provided numerous affidavits of parents who withdrew their children from its programming as a result of the outside league rule. It also noted decreased enrollment in its leagues, losing up to 40 players as a result of the rule.

While these events might have been attributable to other factors, such as the downturn in the economy, along with the withdrawal of players already registered and who forfeited deposits, these facts alleged detrimental effects sufficient to survive a motion to dismiss, the court ruled.

Attempted Monopolization

Dismissal of the attempted monopolization claim was also denied. In order to state a claim of attempted unlawful monopolization, a plaintiff had to allege (1) a specific intent by the defendant to control prices or destroy competition; (2) predatory or anticompetitive conduct undertaken by the defendant directed to accomplishing the unlawful purpose; and (3) a dangerous probability of success.

Regarding specific intent, the complaining program alleged that the motive behind the rule was to prevent it from “taking” players from the defendants. Although the defending league’s stated purpose for the rule was to avoid scheduling conflicts and to prevent player fatigue, certain organizations that arguably would have caused such issues were exempted from the rule. Finally, the withdrawal of players from the complaining program, citing the rule, adequately alleged a dangerous probability of success.

Conspiracy

Conspiracy claims were not adequately alleged, however. The court found that the defendants should be considered part of a “unilateral actor.” The associations within the district did not compete and were deemed a “single economic actor.” Moreover, Minnesota Hockey, the state arm of the national hockey governing board, and the local district were incapable of conspiring.

The May 12 decision, Minnesota Made Hockey, Inc. v. Minnesota Hockey, Inc., is reported at 2011-1 Trade Cases ¶77,453.

Monopoly Claims Were Adequately Alleged Against Diaper Maker Kimberly-Clark

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

Last week, the federal district court in Harrisburg, Pennsylvania, refused to dismiss monopoly claims against Kimberly-Clark brought by competitor First Quality Baby Products, LLC. First Quality—a manufacturer of “private label” or store-brand diapers and training pants—adequately alleged that Kimberly-Clark used its more than 300 patents to disrupt competitors and to maintain a monopoly in the disposable baby diaper and training pants market.

First Quality claimed that Kimberly-Clark:

(1) Maintained a 35 percent share of the market for disposable baby diapers and a 75 percent share in the training pants market and

(2) Engaged in anticompetitive conduct to maintain its monopoly.

Sham Patent Litigation

Kimberly-Clark allegedly threatened patent lawsuits and then engaged in sham litigation to drain the resources of “private label” or store brand manufacturers, thereby reducing their ability to compete.

According to First Quality, Kimberly-Clark enforced patents that it knew to be invalid, procured through fraud on the Patent and Trademark Office (PTO), or not infringed. Further, Kimberly-Clark allegedly misrepresented the nature of the litigation in order to threaten retail outlets to make it the exclusive supplier of store-brand training pants.

Product Disparagement

First Quality also contended that Kimberly-Clark engaged in product disparagement through false claims and coercively acquired licensing agreements through settlements of secret arbitration proceedings.

Each of these acts in isolation might not itself not rise to the level of anticompetitive conduct, but in the aggregate it represented anticompetitive activity tied to the relevant markets that raised a plausible claim for relief, the court decided.

Conspiracy Claims

The court rejected Kimberly-Clark's contention that it was immune from antitrust liability under the Noerr-Pennington doctrine. The doctrine immunizes from antitrust liability those who petition the government. While prosecuting a patent infringement action was the type of activity protected by Noerr-Pennington, exceptions existed for activities that were mere “sham” and conduct before the PTO that was fraudulent.

Kimberly-Clark's conduct could fall within the exception for fraud on the PTO, also known as Walker Process fraud, according to the court. First Quality alleged that Kimberly-Clark deliberately and intentionally withheld material prior art in connection with the prosecution of a patent-in-suit, and, as a result, the PTO issued a patent that was invalid.

The text of the May 17 decision in Kimberly-Clark Worldwide, Inc v. First Quality Baby Products, LLC, appears at 2011-1 Trade Cases ¶77,452.

Merged Health Insurers Did Not Illegally Collude on Pharmacy Rates

This posting was written by Darius Sturmer, Editor of CCH Trade Regulation Reporter.

Now-merged health insurers UnitedHealth Group and PacifiCare did not illegally conspire to depress the rate of reimbursement paid to the nation's largest institutional pharmacy, Omnicare, Inc., for prescription drugs it provided to senior citizens under the Medicare Part D plan, the U.S. Court of Appeals in Chicago has ruled.

UnitedHealth and PacifiCare—both sponsors of the Medicare Part D plan—began merger talks while each was developing an individual Part D plan proposal, and finalized their merger shortly before Plan D's 2006 launch.

According to Omnicare, the insurers conspired to coordinate their negotiations with it while their merger was pending, with UnitedHealth encouraging PacifiCare to use PacifiCare's in-house pharmacy benefits manager (PBM) "as a stalking horse to obtain the best service and contracts."

PacifiCare eventually entered into a contract with Omnicare that had terms significantly less favorable to the pharmacy than UnitedHealth's contract. Then, shortly after the merger became final, UnitedHealth concocted allegedly pretextual reasons to exit its own contract with Omnicare and promptly joined PacifiCare's. Omnicare contended that this course of conduct reflected a buyer's cartel that was per se violative of the Sherman Act.

Anticompetitive Agreement?

The appellate court agreed with the trial court, however, that the evidence on record in the case did not create a genuine issue of material fact as to the existence of an anticompetitive agreement between the insurers.

A granting of summary judgment against Omnicare's federal and Kentucky antitrust claims was therefore affirmed, as was the denial of Omnicare's motion for partial summary judgment on the issue of the insurers' affirmative defenses.

Though Omnicare produced an "extraordinary amount of evidence" to prove the existence of an illegal agreement between UnitedHealth and PacifiCare, it was ambiguous evidence that was at least as consistent with permissible independent action by the insurers as it was with an unlawful agreement, the court stated.

The merger agreement by its own terms, which restricted the ability of PacifiCare to enter into certain contracts without approval of UnitedHealth before the merger was completed, did not establish the existence of a conspiracy in restraint of trade.

The bargaining strategy adopted by PacifiCare, which ultimately resulted in the better deal with the pharmacy, was not shown to be economically irrational in the absence of a conspiracy, the court added.

Pre-Merger Communications

The communications that took place between the insurers prior to the completion of their merger also did not create substantial evidence from which a jury could find the existence of a conspiracy, in the court's view.

In particular, the pricing information they disclosed to each other was not so competitively sensitive that it was inappropriate to disclose before the signing of the merger agreement. Rather, this information exchange was a necessary part of the due diligence process in a merger and appeared to have been conducted in a reasonably sensitive manner, the court observed.

Inference of Independent Action

Even viewing the evidence all together, it still did not tend to negate the reasonable inference of independent action, the court explained. Without sufficient support for a conspiratorial information exchange, Omnicare's claims detailing how the insurers put that information to use was less plausible as well.

The conspiracy theory was further impugned when all of the alleged acts comprising the conspiracy were mapped sequentially and superimposed on a chronological timeline, the court noted. For example, a strategic options memo that was purportedly a blueprint for the insurer's scheme was not drafted until the alleged collusion was well underway, after UnitedHealth already had a contract with Omnicare and before the pharmacy took the initiative to reopen negotiations with PacifiCare.

Moreover, it was difficult to reconcile the theory of an affirmative, ongoing conspiracy to use the PBM as a stalking horse alongside evidence showing that the very target of that conspiracy was the party that made overtures toward it, the court concluded.

The January 10 decision is Omnicare, Inc. v. UnitedHealth Group, Inc., 2011-1 Trade Cases ¶77,304.

New Charges Brought in Antitrust Division's Municipal Bond Investigation

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

A federal grand jury in New York City indicted three former executives of a financial services company for their participation in fraud schemes and conspiracies related to bidding for contracts for the investment of municipal bond proceeds and other municipal finance contracts, the Department of Justice announced on December 9.

One executive also was indicted for witness tampering in connection with the Justice Department’s ongoing investigation into anticompetitive and fraudulent conduct in the municipal bond industry.

Fraud Schemes and Conspiracies

“The individuals charged today allegedly participated in complex fraud schemes and conspiracies that subverted competition in the market for municipal finance contracts and deprived municipal bond issuers of the benefits of their investments to the detriment of the public,” said Christine Varney, Assistant Attorney Generl in charge of the Department of Justice Antitrust Division.

“This type of anticompetitive activity in our financial markets will not be tolerated and the Antitrust Division will continue to prosecute those who engage in this illegal conduct,” Varney remarked. “This includes individuals who purposely seek to obstruct the government’s investigation.”

Investment Agreements

The charged conspiracies and schemes all related to a type of contract—known as an investment agreement—and other municipal finance contracts provided to public entities, such as state, county, and local governments and agencies throughout the United States.

Major financial institutions—including banks, investment banks, insurance companies, and financial services companies—are among the providers of investment agreements and other related municipal finance contracts.

Public entitles typically hire a broker to conduct a competitive bidding process among various providers prior to awarding these agreements and contracts, according to the Justice Department.

One of the defendants, a Belgian national currently residing in Moscow, was arrested at John F. Kennedy International Airport in New York City on December 1 on a criminal complaint that was filed under seal on September 16.

The criminal complaint charged that the individual participated in a scheme to defraud a municipal bond issuer with respect to the investment of municipal bond proceeds.

Superseding Indictment

The indictment alleges that these three individuals conspired with Beverly Hills-based Rubin/Chambers, Dunhill Insurance Services Inc. (CDR), and others in order to obtain from CDR information about the prices and other information related to competiting bids. They then used the information to determine their employer's bid, according to the indictment.

Charges against CDR and some of its current and former executives were the first to be filed in the Justice Department's ongoing investigation. A superseding indictment was filed on December 7 in the case against CDR to include violations of the honest services statute in three counts alleging wire fraud.

A news release on the charges appears here on the Department of Justice Antitrust Division’s website. Further details will appear in CCH Trade Regulation Reporter.

Magazine Publisher Boycott of Wholesaler Not Plausible

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

A defunct magazine wholesaler failed to plausibly allege a conspiracy to drive it out of business among national magazine publishers, distributors, and wholesalers, the federal district court in New York City has ruled. The wholesaler’s claims were dismissed with prejudice.

The wholesaler—the second largest magazine wholesaler in the United States before it was forced into liquidation bankruptcy proceedings in 2009—alleged that it was the victim of a boycott that came in response to its imposition of a surcharge on all single-copy magazines shipped.

According to the wholesaler, the surcharge was intended to create an incentive to eliminate the waste and inefficiency caused by the shipping of excessive copies of magazines. The wholesaler contended that the publishers responded to the surcharge by cutting off 80% of its magazine supply.

Plausibility Standard

The wholesaler’s complaint had to be dismissed with prejudice because it failed to meet the plausibility standard of Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007-1 Trade Cases ¶75,709), and its progeny, the court held. The ultimate goal of the alleged conspiracy—to eliminate two of the four largest magazine wholesalers—was not plausible.

Publishers and national distributors had an economic self-interest in having more wholesalers—not fewer. More wholesalers yielded greater competition, which was good for suppliers. Moreover, the defendants had different reactions to the wholesaler’s “take it or leave it” surcharge, which undermined the wholesaler’s theory of conscious parallel conduct.

Parallel Conduct

The defendants’ decision to stop doing business with the wholesaler—the key parallel conduct allegation—did not create an inference of collusion. The defendants responded to the wholesaler’s unilateral demand, a negative stimulus, by pursuing similar but predictable policies to protect their business interests.

It was plausible that each of the publisher defendants unilaterally stopped shipping magazines to the wholesaler rather than pay the surcharge, the court explained.

The August 2 decision in Anderson News LLC v. American Media, Inc. appears at 2010-2 Trade Cases ¶77,114.

Further information about CCH Trade Regulation Reporter appears here on the CCH Online store.

Dentists, Dental Association Failed to Allege Fraud in RICO Claim Against Insurers

This posting was written by Mark Engstrom, Editor of CCH RICO Business Disputes Guide.

Three dentists and the American Dental Association (ADA) failed to assert a plausible class-action RICO claim against five insurance companies that allegedly engaged in a scheme to defraud dentists by reducing payments for dental services through improper bundling, automatic downcoding, and the manipulation of dental procedure codes, the U.S. Court of Appeals in Atlanta has held. The dismissal of the plaintiffs’ RICO claims was therefore affirmed.

Bundling and Downcoding Procedures

The plaintiffs complained that they performed multiple procedures worthy of larger benefit payments, but that the insurers had bundled and “downcoded” those procedures into fewer claims worthy of small payments.

The plaintiffs also alleged that the fraudulent scheme would work only if the insurers had agreed to employ the same devices and tactics.

According to the plaintiffs, the insurers sent out letters and e-mails stating that dental procedures submitted as multiple claims would be grouped together as a single procedure for the purpose of benefits payments.

The plaintiffs failed, however, to (1) identify any specific misrepresentations in the letters and e-mails; (2) connect the allegedly fraudulent communications to particular acts of downcoding or bundling; or (3) allege how the insurers had agreed to employ these procedures as part of a long-term criminal enterprise predicated on mail and wire fraud, the court observed.

Conspiracy

Because the allegations in the plaintiffs’ complaint did not support an inference of an agreement to the overall object of the conspiracy—or an agreement to commit at least two predicate acts—the complaint failed to assert a valid RICO conspiracy claim. In the court’s view, the allegations contained only conclusory statements and unwarranted deductions of fact.

Plaintiffs, for example, attempted to bolster their conspiracy claim by describing the defendants’ “collective” or parallel actions, from which they inferred the existence of an agreement. The court noted, however, that the U.S. Supreme Court has stated that “when allegations of parallel conduct are set out . . . they must be placed in a context that raises a suggestion of a preceding agreement, not merely parallel conduct that could just as well be independent action (Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 2007-1 Trade Cases ¶75,709).

Lawful, Independent Conduct

In this case, there existed—for each of the collective actions alleged—an “obvious alternative explanation” that suggested lawful, independent conduct, the appellate court determined. The allegation that the insurers had downcoded and bundled claims, for example, could be attributed to the use of computers, which could process claims efficiently. Downcoding and bundling may be proper in a competitive market, the court reasoned, in order to decrease physicians’ costs and increase corporate profits.

The argument that a conspiracy could be inferred from the insurers’ participation in trade associations and other professional groups was unavailing. According to the court, it was “well settled before Twombly” that participation in trade organizations “provides no indication of a conspiracy.”

The May 14 decision, American Dental Association v. Cigna Corp., appears at CCH RICO Business Disputes Guide ¶11,843.

Art Buyer's Antitrust Claims Against Art Foundation, Authenticator Survive Dismissal

This posting was written by Darius Sturmer, Editor of CCH Trade Regulation Reporter.

An art buyer's claims that the only two entities authenticating art works by Andy Warhol acted in concert to artificially restrict competition in the market for authentic Warhols sufficiently alleged a conspiracy or an attempt to monopolize, the federal district court in New York City has ruled.

While the buyer was barred from pursuing claims based on his own art purchase, owing to expiration of the statute of limitations and a lack of antitrust injury, he could seek damages arising from his inability to sell a painting because of the defendants' declarations that the work was a forgery. The defendants' motion to dismiss was granted in part and denied in part.

The complaining buyer asserted that the scheme had the effect of raising the prices of Warhol works held by one of the entities—The Andy Warhol Foundation for the Visual Arts, a not-for-profit charitable trust with considerable holdings of Warhol's works—and of ensuring that galleries and museums chose only the works owned by the Foundation so as to limit the risk that their authenticity would later come under attack.

Twombly Standard

The buyer's factual allegations in support of his antitrust claims satisfied the Twombly plausibility standard, the court found. These allegations included charges that the authentication board made unsolicited suggestions to owners of purported works to submit those works for authentication, that its authentication policies were inconsistently applied and allowed it to reverse prior determinations when doing so would further the conspiracy, and that it had denied the authenticity of works that its associates had previously authenticated or which the Foundation had been unable to purchase.

Further, the buyer averred facts indicative of anticompetitive conduct with a specific intent to monopolize and a dangerous probability of achieving monopoly power, the court stated.

Antitrust Injury

The complaining buyer did not suffer antitrust injury arising from the alleged price-inflationary aspects of the defendants' conspiracy, but could have been injured by the denial of authentication of his artwork—and the authentication board's double-stamping of “denied” on the work itself, the court said.

He did not buy the work at issue from the Foundation, and nowhere in his complaint did he claim that the work was ever sold by the Foundation or recognized by the authentication board as authentic. Therefore, his claims had to be dismissed to the extent that they were based on allegations that the defendants' actions artificially raised prices for Warhol works.

However, the buyer's assertions that the defendants' actions prevented him "from competing as a seller in the lucrative market for authentic Warhols" were sufficient to frame an antitrust injury, according to the court.

Statute of Limitations

Even if the complaining buyer had alleged antitrust injury from his inflated purchase price, such a claim was barred by the statute of limitations. The buyer bought the painting 18 years prior to filing suit and alleged no facts warranting a finding of fraudulent concealment that would defeat the limitations bar, the court explained.

He was not, however, precluded from pursuing claims based on the defendants' later denials of authentication—and, thus, the exclusion from the market for authentic Warhol works—even though the original denial occurred five years prior to the lawsuit.

The buyer alleged sufficient facts to invoke the continuing conspiracy exception based on the second denial, which occurred within the limitations period. The second denial was not a mere reaffirmation of the first, in the court's view. The defendants not only permitted, but encouraged, him to resubmit the painting with additional documentation. Thus, he could have suffered additional, distinct injury as a result of the second denial, the court found.

False Advertising

Letters by the defendants that allegedly fraudulently denied the authenticity of the painting could constitute false advertising in violation of Sec. 43(a) of the Lanham Act, the court decided. Although a statement of opinion was not actionable under the Lanham Act if it could not reasonably be seen as stating or implying provable facts about a competitor's goods or services, it was not clear, at this stage of the case, that the authenticators' letters were mere statements of opinion.

The decision is Simon-Whelan v. The Andy Warhol Foundation for the Visual Arts, Inc., 2009-1 Trade Cases ¶76,657.

Internet Name Registrar Could Have Violated Antitrust Law to Get Contracts

This posting was written by Darius Sturmer, Editor of CCH Trade Regulation Reporter.

Internet domain name registry operator VeriSign, Inc., could have violated federal antitrust law by allegedly conspiring with, or engaging in predatory conduct against, the Internet Corporation for Assigned Names and Numbers (ICANN), the U.S. Court of Appeals in San Francisco has ruled.

VeriSign's conduct was purportedly intended to set artificially high prices for its registry services and to ensure that it would receive successor contracts with ICANN without having to go through a competitive bidding process.

Dismissal of Sherman Act, Sec. 1 and 2 claims brought against VeriSign by an organization composed of participants in the Internet domain name system (such as Web site owners) was therefore reversed and remanded.

VeriSign acts as the sole operator of the ".com" and ".net" Internet domain name registries pursuant to separate agreements with ICANN, which coordinates the Internet domain name system on behalf of the U.S. Department of Commerce.

Conspiracy

The automatic renewal term of the contract for the ".com" domain was an actionable restraint on trade because it was sufficiently alleged to have been the product of a conspiracy between VeriSign and ICANN in which VeriSign participated with the intent to restrain trade, the appellate court held.

Further, the pricing provisions of the contract, which provided for a seven percent per year increase in the allowable registration fee, could give rise to antitrust liability because that increase was alleged to exceed the rate competitive market conditions would produce.

An argument that an antitrust claim could not be based on price increases alone was rejected because the pricing at issue was not alleged to be unilateral action in the context of a monopolization claim but concerted action intended to restrain trade.

The renewal and pricing terms of the ".net" contract, on the other hand, were not similarly actionable because they were reached as a result of competitive bidding, not conspiratorial action, the court stated.

Attempted Monopolization

The organization's extensive factual allegations of predatory conduct, in which VeriSign engaged in order to secure the ".com" agreement, sufficed to state a claim for attempted monopolization, in the appellate court's view.

It was noted that the trial court, in concluding that the organization had failed to state a claim for predatory conduct, had erroneously construed that allegation in the complaint as pertaining solely to VeriSign's litigation against ICANN, rather than to the predatory and harassing activities that accompanied that litigation. These alleged activities included actions such as paying lobbyists to support its positions, stacking ICANN's public meetings, paying bloggers to attack ICANN's position, planting news stories critical of ICANN in mainstream media, and threatening various investigations and lawsuits. Thus, the lower court's reliance on the Noerr-Pennington doctrine—which immunizes only litigation activity, but not other forms of threats or harassment—was misplaced.

However, as with the Sec. 1 claim, the claim of predatory conduct in the ".net" registration market was insufficiently stated, the court added. The complaint's allegations did not reflect any assertion that VeriSign's predatory activity had any bearing on the competitive bidding process that resulted in the ".net" agreement.

Relevant Market

The organization's claim that VeriSign attempted to monopolize the market for expiring domain names also should not have been dismissed, the appellate court decided. The viability of the claim turned on the issue of relevant market, namely whether the organization adequately pled the existence of a separate market.

According to the organization, expiring domain names were more valuable than other names because, in all likelihood, they had already been advertised by the previous owner and already had Web traffic. In light of these market conditions, which had not been explained to the district court, the appellate court was not prepared to affirm the lower court's ruling that no separate market existed.

The June 5 decision is Coalition for ICANN Transparency, Inc. v. VeriSign, Inc., 2009-1 Trade Cases ¶76,642.