Private Enforcement

Trends in Private Federal Antitrust Litigation: Class Actions Driving Growth, but the Supreme Court Makes it Harder for Private Litigants to Prevail

Following a dramatic increase in the number of filings of private federal antitrust cases during the past 10 years, practitioners witnessed a marked decline in the number of such cases filed over the last 12 months. This decline parallels the economic downturn and may simply reflect a short-term reluctance on the part of potential litigants to risk capital in times of unprecedented economic uncertainty. But this decline also coincides with key Supreme Court jurisprudence that continues to raise the bar for private plaintiffs to plead and prove federal antitrust violations. Only time will tell whether private antitrust filings have truly leveled off, but the combination of economic recovery, increased financial incentives, and the promise of aggressive government enforcement suggests that the first half of 2009 may simply be the calm before the storm.

Federal court antitrust filings dropping to pre-2006 levels

2006 to 2008 marked the first time in decades that private plaintiffs filed more than 1,000 antitrust cases in three consecutive years. Private plaintiffs filed 1,050 federal antitrust cases in 2006, 1,028 federal antitrust cases in 2007 and 1,239 federal antitrust cases in 2008.1 This level of filings marked a significant increase over the filings from 1990 to 2005,2 which averaged fewer than 750 cases per year.3

The number of federal private antitrust cases filed in 2009, however, is on pace to return to the lower pre-2006 levels. After an incredible 774 private antitrust cases filed in the first half of 2008, the pace of filings fell sharply, with only 465 cases filed in the second half of 2008. The decline has continued in 2009, with just 389 cases filed through June. The timing suggests a strong correlation between the recession and the decline in private antitrust case filings. It remains to be seen whether the number of filings will return to 2006 to 2008 levels once the economy has recovered or whether that surge will prove to be anomalous.

Class actions driving swings in number of cases filed

The number of class action suits filed by private plaintiffs appears to be the primary element of change in the number of private antitrust cases filed each year. Though there is some fluctuation, the number of individual private antitrust cases filed each year for the 10-year period from 1999 to 2008 remained relatively stable, with 425 such cases filed in 1999 and 474 filed in 2008, and an average of just over 420. The number of antitrust class actions filed for the same period, however, climbed from 208 in 1999 to 765 in 2008, with an average of just under 410. This growth represents a more than 3.5-fold increase in federal antitrust class-action filings during the period.

Though the first half of the decade saw some growth in the number of antitrust class-action filings, the rise in post-2005 filings has been dramatic. For the period from 1999 through 2005, for example, the number of antitrust class-action filings ranged from a low of 197 in 2003 to a high of 405 in 2000, averaging just over 290 per year. In contrast, during the last three years the number of filings grew to 600 in 2006, 669 in 2007 and 765 in 2008, averaging almost 680 per year. The vast majority of class-action filings in 2008, however, came in the first half of the year (542), dropping dramatically in the second half of the year (223). This decline continued in the first half of 2009, with just 199 cases filed by 30 June.

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Understanding the catalysts for prior growth

As our colleagues explained in these pages last year, much of the growth in class-action cases results from duplicative filings. Under Rule 23 of the Federal Rules of Civil Procedure, a plaintiff filing an antitrust class action seeks to represent all similarly situated potential plaintiffs, meaning all people or entities allegedly injured by the same antitrust conduct. An antitrust plaintiff in federal court typically seeks to represent a nationwide class of plaintiffs. To represent a class, a plaintiff must obtain class certification and class counsel must be appointed. It is not uncommon for multiple class-action plaintiffs to separately file similar antitrust lawsuits, based on the same cause of action and a similar set of allegations, against the same defendant(s). When multiple plaintiffs file such duplicative lawsuits seeking to represent the same nationwide class, the federal court system uses the Judicial Panel on Multidistrict Litigation (JPML) to reduce the burden on both the judiciary and the parties while generally preserving each plaintiff’s right to trial in its chosen forum.4

The JPML, composed of seven sitting federal judges appointed by the chief justice of the United States, has the authority to consolidate these duplicative class-action lawsuits into a single proceeding. The proceeding is then transferred to a single federal district court for all pre-trial purposes. The consolidation eliminates duplicate discovery and prevents inconsistent pre-trial rulings. Most JPML cases are resolved in the transferee court,5 but the JPML consolidation does not necessarily eliminate the overlapping cases. As the transferee court typically lacks original jurisdiction, the JPML may remand an individual case to the transferor court upon suggestion by the transferee court or motion by any party at the conclusion of pre-trial proceedings.6

The JPML mechanism works to treat these largely duplicative cases as one, even if they technically comprise a group of distinct cases. Sixty-seven multidistrict litigation (MDL) antitrust cases were pending as of 30 September 2008, or closed since 1 October 2007.7 Each of those proceedings covered anywhere from three to 135 distinct filings, with an average of just over 33. For example, In re Digital Music Antitrust Litigation is a consolidation of 31 actions alleging price fixing in violation of Section 1 of the Sherman Act and various state antitrust laws into one MDL proceeding in the Southern District of New York,8 and In re TFT-LCD (Flat Panel) Antitrust Litigation is a consolidation of 135 actions alleging price fixing in violation of Section 1 of the Sherman Act and various state antitrust laws into one proceeding in the Northern District of California.9 Thus, the significant growth in antitrust class-action filings witnessed in recent years does not necessarily indicate such explosive growth in unique antitrust cases. Rather, the surge in class-action filings from 2006 to 2008 suggests a proliferation of duplicative filings.

Financial motivation for plaintiffs’ counsel

The growth in class-action filings, both duplicative and unique, may well be driven by two intertwined characteristics of class actions: attorneys’ fees and the bonus incentives associated with a firm’s selection as lead counsel for the class.

The potential payouts – and concomitant attorneys’ fees – are an incredible pecuniary incentive for a law firm to file suit on behalf of a potential class representative. Antitrust class actions rarely go to trial, with some studies showing that only about one per cent of cases consolidated by the JPML in recent years actually went to trial. The vast majority of these consolidated matters result in pre-trial settlements by one or more defendants. The payouts from these settlements are often huge. An examination of publicly available settlement data for dozens of MDL cases settled since 1990 reveals an average settlement of over US$300 million. It should be noted, however, that the settlement amounts vary greatly, ranging from less than US$1 million10 to almost US$5 billion,11 with a median of US$57 million. Even excluding the settlements over US$1 billion, the average is still around US$100 million.

Attorneys’ fees in antitrust class actions typically range from 10 to 30 per cent or more and are often deducted from the total settlement (along with costs incurred by the plaintiffs’ attorneys and costs of providing notice to the class members) prior to distributing payments to the class.12 Assuming a plausible average attorneys’ fee award of 20 per cent and an average settlement of US$300 million, a class plaintiffs’ attorney can, on average, expect to receive roughly US$60 million in fees for a successfully settled MDL antitrust litigation.

This potential multimillion-dollar carrot incents great competition among law firms for selection as lead or liaison counsel for plaintiffs. Antitrust class actions are typically mammoth in scope, involving dozens of law firms with a host of lawyers and other professionals advocating on behalf of the plaintiffs. Over the past two decades, a typical antitrust MDL class action lasts more than five years from the filing of the first complaint to the resolution and closing of the case. The duration of a case only seems to be lengthening in recent years. For example, the MDL case of In re Flat Glass Antitrust Litigation was brought in August of 1997, but did not settle until June of 2006.13

Such a massive endeavor requires experienced counsel to provide both leadership and organisation. As a result, plaintiffs typically ask the transferee court to appoint a lead or liaison counsel to run their case. This coveted position empowers the lead or liaison counsel to control staffing and workloads among the plaintiffs’ firms, typically resulting in the lead firm earning the largest share of any attorneys’ fee award obtained.14

The transferee court ordinarily selects a lead or liaison counsel shortly after consolidation by the JPML. Though generally governed by the basic standards set forth in Rule 23 of the Federal Rules of Civil Procedure, a court has much leeway in appointing lead counsel. Many, if not most, courts select lead counsel based on the ‘first to file’ rule, meaning that the first law firm to file a complaint in the case is favoured for the lead counsel position.15 A firm’s status as the first (or one of the first) to file a complaint is seen as demonstrating knowledge of the industry and the alleged facts at issue in the case. This unofficial rule has the unfortunate tendency of encouraging firms to ‘race to the courthouse’ to be the first file, resulting in many duplicative filings.

Class Action Fairness Act of 2005

In addition to the financial incentives for law firms discussed above, another important factor in the growth of federal class-action filings is the Class Action Fairness Act of 2005 (CAFA).16 With limited exceptions, CAFA expands federal jurisdiction to include all class actions in which the amount in controversy exceeds US$5 million; and any member of a class of plaintiffs is a citizen of a state different from any defendant, any member of a class of plaintiffs is a foreign state or a citizen of a foreign state and a defendant is a citizen of a state, or any member of a class is a citizen of a state and any defendant is a foreign state or a citizen of a foreign state.17

CAFA’s significance with regards to antitrust litigation stems from the Supreme Court’s decision in Illinois Brick Co v Illinois, in which the Court held that indirect (downstream) purchasers are not entitled to recovery for injuries incurred as a result of a violation of federal antitrust law.18 Though heavily criticised by the lower courts, Illinois Brick has not been overturned and remains binding precedent at the federal level. Many state antitrust laws, however, allow for indirect purchaser class actions.19 CAFA expands federal jurisdiction to cover most large indirect purchaser class actions brought under these state laws.20 Though our data does not isolate antitrust class actions filed in federal court based on CAFA jurisdiction, the fact that the surge in class action filings started the year after CAFA was passed suggests that CAFA has played a role in the growth, with class plaintiffs filing in federal rather than state court. Moreover, rough data for the state of California, which allows indirect purchasers to recover treble damages,21 is illustrative of this trend. The number of antitrust cases filed in California circuit courts dropped significantly in 2005, the year CAFA went into effect.22 The drop appears correlated to a decline in the number of class-action cases filed in the state. When examined in combination with the federal data, the reduction in California filings suggests a shift in choice of forum from state courts to the newly expanded jurisdiction of the federal courts.

Understanding the catalysts for recent decline

Just as the growth in filings from 2006 to 2008 was marked by a surge in class actions, so too was the recent decline accompanied by a significant drop off in class-action filings. Individual filings continue at a steady pace. From the first half of 2006 through the first half of 2008, each six-month period had between 287 and 542 class action filings. That number dropped to 223 in the second half of 2008 and just 199 in the first half of 2009.

Because the financial incentives for plaintiffs’ lawyers and the influence of CAFA remain unchanged, we believe that the decline in class-action filings is driven by two converging factors: an aversion to financial risk in the current economic climate and the heightened standards for pleading and proving an antitrust violation set by several recent Supreme Court decisions.

Aversion to financial risk in the current economic climate

It appears that the financial risk associated with bringing a class action on a contingency basis in the present economic climate may outweigh the potential benefits for many firms. Given that a class action typically takes five years to resolve and the firm has no chance of payment until the time of resolution, one may speculate that many plaintiffs’ attorneys will hold off on bringing, at a minimum, marginal class actions until they are on surer economic footing. Furthermore, some plaintiffs’ firms that take cases on contingency depend on loans from litigation finance companies or banks to cover the costs of litigation.23 These loans often come with a hefty fee or interest rate due to the inherent risk involved in a contingency case.24 Given the shrinking availability of credit during this economic downturn, it follows that access to litigation financing may be dwindling or, at the very least, come with an even higher interest rate. If a significant number of plaintiffs’ firms are abstaining from the pursuit of class action opportunities due to a lack of financing, it would not be surprising to see class-action filings move in tandem with the economic recovery and the concomitant increased access to credit.

Supreme Court: continued roadblocks for plaintiffs

In its latest term, the US Supreme Court continued to make it more difficult for a plaintiff to plead and prove an antitrust violation with its decision in Pacific Bell Telephone Co v linkLine Communications Inc.25 In linkLine, the court held that a ‘price-squeeze’ claim, where a dominant firm raises prices in the wholesale market in order to drive out competition from the retail market, cannot be brought under Section 2 of the Sherman Act absent an antitrust duty on the part of a dominant firm to deal with its rivals.26 Rather than simply pleading the fact of exclusion, a plaintiff must also plead two distinct and economically complex elements: a duty to deal and predatory pricing. That is, the plaintiff must first establish a duty to deal with its rivals in accordance with the Court’s holding in Verizon Communications Inc v Law Offices of Curtis V Trinko.27 The plaintiff must then establish that the defendant’s pricing was predatory under the two-part test found in Brooke Group Ltd v Brown & Williamson Tobacco Corp: the dominant firm’s prices were below a relevant measure of its rival’s costs, and there was a ‘dangerous probability’ that the dominant firm would be able to recoup its losses through future monopoly profits.28

The Court’s decision in linkLine is consistent with its recent jurisprudence, setting clear standards that must be met for a plaintiff to plead and prove an antitrust violation,29 rather than the amorphous tests of such appellate cases as LePage’s.30 And the decision is already impacting lower-court decisions. Applying linkLine, the Ninth Circuit recently held in Doe v Abbott Labs that the plaintiffs’ allegation of monopoly leveraging through pricing conduct in two markets, without evidence of an antitrust duty to deal in the monopoly market or below-cost pricing in the secondary market, failed to state a claim under Section 2 of the Sherman Act.31 Thus, though the dominant trend in the past 10 years has been for plaintiffs to file more and more antitrust lawsuits, the Supreme Court cases make it more difficult for frivolous cases to succeed, even at the pleadings stage.32

Anticipated recovery

Though the recent Supreme Court decisions should continue to have some effect on the pace of antitrust cases filed each year, we expect the depth of the decline to be short-lived. First, any decrease caused by the current economic crisis will be only as short- (or long-) lived as the economic crisis itself. Therefore, we expect some increase in the number of antitrust class actions filed as the economy recovers and the aversion to risk is diminished.

Second, the Obama administration’s promise of increased government antitrust enforcement is likely to add to any resurgence in class-action filings, especially in abuse of monopoly cases under either Section 2 of the Sherman Act or Section 5 of the FTC Act.33 Federal antitrust enforcement in the US is the dual province of both the federal government and ‘private attorneys general.’34 As such, public antitrust enforcement typically prompts a deluge of follow-on private litigation. The mere announcement of an investigation by the US Department of Justice, the US Federal Trade Commission, or even the European Commission may trigger the class-action plaintiffs’ bar to file dozens of ‘tag-along’ class action lawsuits. Should the Obama administration combine the vigorous criminal enforcement of the last administration with a renewed focus on potential Section 2 violations, the overall increase in public enforcement may well prompt a surge of new class-action filings, even given the current economic environment.

Despite the recent decline in filings during the economic downturn, it is too soon to draw any firm conclusions. The anticipated increase in enforcement actions by the Obama administration may serve as a counterweight to the more stringent interpretation of the antitrust laws by the Supreme Court. This is a transitional time in private antitrust filings, and the complicated set of factors at play makes prognostication very difficult. We believe, however, that filings will stay flat or rise slightly over the next 12 months, depending on the speed of the economic recovery and the timing of any enforcement actions by the agencies. As the economy recovers and access to capital is restored, we believe that increased government enforcement will likely provide a host of new opportunities for ‘tag-along’ class actions that could serve as a catalyst for a return to the historic highs witnessed during the last three years.

Notes

1 Unless otherwise noted, all data referenced in this article are sourced from CourtLink (www.courtlink.com). We conducted searches for all civil antitrust cases filed in US district courts and for all class-action antitrust cases filed in US district courts for each six-month period from 1 January 1999 through 30 June 2009 and then manually subtracted all civil government cases. We also conducted searches for all civil antitrust cases filed in US district courts for each calendar year from 1990 through 1998. All data are on file with the authors.

2 1990 is the first year for which reliable data is available.

3 Joseph Ostoyich et al, ‘More of the Same: Growth in Private Antitrust Litigation and Cutbacks by the US Supreme Court’, Antitrust Review of the Americas 2009, Global Competition Review, Sept 2008, 46-49.

4 See US Judicial Panel on Multidistrict Litigation, An Overview of the United States Judicial Panel on Multidistrict Litigation, www.jpml.uscourts.gov/General_Info/Overview/overview.html. See also John G Heyburn II, ‘A View from the Panel: Part of the Solution’, 82 Tul L Rev 2225, 2233-34 (2008).

5 See Heyburn, supra note 4, at 2231.

6 Id at 2233-34; Bruce B Spiva & Jonathon K Tycko, ‘Indirect Purchaser Litigation on Behalf of Consumers After CAFA’, 20 Antitrust ABA 12, 16 (2005).

7 See US Judicial Panel on Multidistrict Litigation, Statistical Analysis of Multidistrict Litigation 2008, www.jpml.uscourts.gov/General_Info/Statistics/Statistical-Analysis-2008.pdf.

8 444 F Supp 2d 1351, 1351-52 (JPML 2006).

9 483 F Supp 2d 1353, 1354 (JPML 2007).

10 In re Sodium Gluconate Antitrust Litigation, MDL No. 1226 (ND Cal).

11 In re Vitamin Antitrust Litigation, MDL No. 1285 (DDC).

12 Ostoyich et al, supra note 3, at 47. The percent is typically higher for lower recovery amounts and, conversely, lower for higher recovery amounts. An examination of select cases that recovered US$500 million or less showed an attorneys’ fees range of 7 to 33.3 per cent, with all but a couple outliers falling between 20 and 33.3 per cent. A similar examination of select cases that recovered US$500 million or more showed an attorneys’ fees range of 5.2 to 25 per cent, with most cases falling in the single digits. Robert H Lande & Joshua P Davis, An Evaluation of Private Antitrust Enforcement: 29 Case Studies, Interim Report, Tables 6A, 6B, and 6C, 8 Nov 2008, www.antitrustinstitute.org/archives/files/550b.pdf.

13 See Order Approving Distribution of Settlement Proceeds, In re Flat Panel Antitrust Litigation, MDL No. 1200 (WD Pa 6 June 2006).

14 Jill E Fisch, ‘Lawyers on the Auction Block: Evaluating the Selection of Class Counsel by Auction’, 102 Col L Rev 650, 654-55 (2002) (‘the selection of lead counsel effectively allocates the economic rewards of the litigation’).

15 Id at 656.

16 28 USC Section 1332(d) (2009).

17 Id.

18 431 US 720, 728-29 (1977).

19 J Thomas Prud’Homme Jr & Ellen S Cooper, ‘One More Challenge for the AMC: Repairing the Legacy of Illinois Brick’, 40 USF L Rev 675 (2006).

20 Steven M Puiszis, ‘Developing Trends with the Class Action Fairness Act of 2005’, 40 J Marshall L Rev 115, 193 (2006).

21 Cal Bus & Prof Code Section 16570(a) (2009).

22 Courtlink data indicates that the number of antitrust cases filed in California state courts has dropped significantly since the enactment of CAFA.

23 Douglas R Richmond, ‘Other People’s Money: The Ethics of Litigation Funding’, 56 Mercer L Rev 649, 650-51 (2005); Susan Lorde Martin, ‘The Litigation Finance Industry: The Wild West of Finance Should Be Tamed Not Outlawed’, 10 Fordham J Corp & Fin 55, 72 (2004); Courtney R Barksdale, ‘Note, All That Glitters Isn’t Gold: Analyzing the Costs and Benefits of Litigation Finance’, 26 Rev Litig 707, 708-09 (2007).

24 Richmond, supra note 24, at 650-51; Martin, supra note 24, at 72; Barksdale, supra note 24, at 710-11.

25 129 S Ct 1109 (2009).

26 Id at 1114.

27 540 US 398, 410 (2004).

28 509 US 209, 222-224 (1993).

29 See Leegin Creative Leather Prods v PSKS Inc, 551 US 877 (2007) (vertical resale price maintenance under Section 1 of the Sherman Act is not per se illegal); Bell Atl Corp v Twombly, 550 US 544 (2007) (to state a claim under Section 1 of the Sherman Act, a plaintiff must plead sufficient facts to render its conspiracy claim ‘plausible’); Credit Suisse Sec (USA) LC v Billing, 551 US 264 (2007) (US securities laws preclude a class plaintiff’s antitrust claims against the commission structure of underwriting firms); Weyerhauser Co v Ross-Simmons Hardwood Lumber Co, 549 US 312 (2007) (extending the Brooke Group test to allegations of predatory bidding).

30 LePage’s Inc v 3M, 324 F3d 141 (3d Cir 2003) (en banc).

31 No, 08-17699, 2009 US App LEXIS 14841, *1-2, 7-12 (9th Cir 7 July 2009).

32 See, eg, Twombly, 550 US at 555 (to state a claim under Section 1 of the Sherman Act, a plaintiff must plead sufficient facts to render its conspiracy claim ‘plausible’).

33 See, eg, Christine Varney, assistant attorney general, Antitrust Division, US Dept of Justice, Remarks as Prepared for the Center for American Progress: Vigorous Antitrust Enforcement in This Challenging Era (11 May 2009), http://graphics8.nytimes.com/images/2009/05/12/business/VarneySpeech.pdf; Stephen Labaton, ‘Administration Plans to Strengthen Antitrust Rules’, NY Times, 11 May 2009, www.nytimes.com/2009/05/11/business/11antitrust.html; Elizabeth Williamson & Matthew Karnitschnig, ‘US Signals More Scrutiny of Mergers, Antitrust’, Wall St J, 12 May 2009, at B1.

34 Hawaii v Standard Oil Co, 405 US 251, 262 (1972).