Choice of Law, Antitrust Class Actions, and the Value of State Inaction

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When you defend antitrust class actions in federal court like we do, you often see a long list of state antitrust claims brought by what are called indirect purchasers. That is because the federal antitrust laws have this strange quirk that usually forbids federal antitrust claims for damages by indirect purchasers.

You can read more about the history of how this doctrine developed here, including Illinois Brick and Hanover ShoeAnd you can learn about the most recent Supreme Court developments for indirect purchasers, including the Court’s Apple v. Pepper case, here.

As sometimes happens when the US Supreme Court changes federal antitrust law, politicians melt down and some state governments pass reactive legislation altering their state antitrust statutes. If you are an armchair antitrust litigator, you might recall that after the Supreme Court announced its resale-price-maintenance decision in Leegin, some state governments responded with legislation so these vertical agreements would hold their per-se-violation status, at least under certain state laws.

After the Supreme Court eliminated most indirect-purchaser damage actions (see here for the co-conspirator exception), many states began allowing them under their own antitrust laws. So even though federal law bars these claims, class-action defendants still face them when a separate group of indirect-purchaser class plaintiffs sue in federal court under a hodgepodge of state antitrust laws. And it’s a little messy.

For background, the states that allow indirect purchaser damage actions are called repealer states and those that don’t are called non-repealer states. And the repealer states themselves vary in the scope of what they permit.

So, faced with this mess of conflicting state antitrust laws, class counsel will do what they can to streamline the applicable-law analysis for the presiding judge. Indeed, to achieve class certification, the plaintiff class must show not only that there is commonality among the class members, but also (for most actions) that the common questions predominate over the individual questions. A defendant might defeat class certification by showing that conflicting applicable laws overwhelm common issues of fact and law.

Until recently, it was not uncommon for a plaintiff class to sue a California-based defendant for damages in California federal court, on behalf of indirect purchasers from all the states—repealer and non-repealer alike. Their argument was that under California choice-of-law doctrine, California’s antitrust law—the Cartwright Act—applies to all of the claims because the “bad acts” were done in California, even though many class members experienced the injury outside of California. California, you might have guessed, is a repealer state that allows indirect purchaser damages under its antitrust law.

You can see what a luxurious solution this is for the indirect purchaser class plaintiffs: They can expand their total damages, even to potential class members in non-repealer states and the court need only analyze one jurisdiction’s law, California. And they can avoid writing the tedious briefs canvassing the laws of many different states. I can tell you, first-hand, that this briefing is monotonous for the defense side too—and probably the court.

Choice of Law and Stromberg v. Qualcomm

Of course, this “solution” assumes that it is proper under choice-of-law analysis to apply California law to all of the claims. This issue arose in the Ninth Circuit in 2021, in Stromberg v. Qualcomm, and Judge Ryan D. Nelson, writing for the Court, analyzed it marvelously.

This isn’t an article analyzing this Qualcomm decision, but I’ll tell you about what the court did on choice of law, the implications of that decision, and its broader lesson.

Important NoteBona Law filed an amicus brief in a different, but potentially related, case in the Ninth Circuit supporting Qualcomm in an antitrust case brought by the FTC. So, based upon that appellate brief, the fact that we represent defendants in antitrust class actions, and that I generally like and respect Qualcomm, which is a San-Diego-based company, you should assume that I am biased. Indeed, if you are a sophisticated reader, you should always try to understand the writer’s perspective and potential biases because they affect the writing, even unintentionally.

Anyway, similar to the scenario above, this was a case in which the plaintiff class convinced the district court to apply California law to indirect purchaser claims from all over the country—both repealer and non-repealer states. In doing so, the court granted class certification, and Qualcomm appealed that grant under Rule 23(f) of the Federal Rules of Civil Procedure.

You can read more here about appealing a class certification order under Rule 23(f).

The Ninth Circuit ultimately condemned the district court’s choice-of-law analysis as faulty. Instead of California law applying to all claims, the laws of each of the other states should have applied to their respective resident plaintiffs.

Federal courts apply the choice of law rules of the forum state (here, California) to state claims. To determine the correct choice of law, California has a three-step governmental interest test:

  1. “First, the court determines whether the relevant law of each of the potentially affected jurisdictions with regard to the particular issue in question is the same or different.”
  2. “Second, if there is a difference, the court examines each jurisdiction’s interest in the application of its own law under the circumstances of the particular case to determine whether a true conflict exists.”
  3. “Finally, if the court finds that there is a true conflict, it carefully evaluates and compares the nature and strength of the interest of each jurisdiction in the application of its own law to determine which state’s interest would be more impaired if its policy were subordinated to the policy of the other state, and then ultimately applies the law of the state whose interest would be more impaired if its law were not applied.”

The various state laws materially differed. Even among the repealer states, there were variations in the scope of the laws. The Ninth Circuit said the district court overlooked this point.

The district court concluded that California had an interest in applying its antitrust law: to deter its resident corporations from violating the antitrust laws. But—remarkably—the district court also held that the states that don’t allow indirect purchaser antitrust actions for damages, the non-repealer states, had “no interest in applying their laws to the current dispute.”

At first glance, maybe that isn’t remarkable? If a particular state doesn’t provide a cause of action for an indirect purchaser, what does it care if a federal court applies California law to provide that non-repealer state’s citizen with damages for an alleged antitrust violation by a California company?

But if you think about this a little more deeply, you see that the reasoning includes a fatal flaw that sadly discards our principles of limited government.

The Ninth Circuit caught it. Judge Nelson, writing for the Court, pointed out that non-repealer states designed their laws to regulate antitrust enforcement “by allocating recoverable antitrust damages in the way those states think best promotes market competition.” The decision not to allow indirect purchaser damages recovery is itself a policy choice by a state about how it “wants antitrust laws enforced within its borders so competition and business can be best promoted in the state.” These states should have the ability to “attract more business in-state from entities like Qualcomm (and those that do business with Qualcomm) by creating a more favorable business environment.”

The district court placed literally zero value on a decision by a state to not interfere with a particular aspect of people’s lives. A decision by a state to decline to pass a law permitting indirect-purchaser antitrust actions for damages may seem technical and insignificant to the every-day person, but absent a lawful act, the assumption for our form of government is that the state is not exercising power. That open space is left to the people; the default is freedom.

The foundation of our state and federal governments is that they have a limited role in our lives, not that they mix with every molecule we breathe.

If a choice-of-law analysis doesn’t respect the absence of state action as a legitimate value, it creates a ratchet away from liberty and toward complete control by government. While this sounds like over-heated rhetoric about a technical choice-of-law decision, we see this same ratchet away from liberty repeatedly. This is just one small example.

This critical and offensive mistake in the choice-of-law analysis is, unfortunately, of the same nature that many, even most, continue to make. The government is not tasked with solving all problems and when it acts, there are costs to its action. The costs may be direct, by, for examples, wasting time and money based upon a Twitter joke, or overregulating in a way that increases barriers to entry, pushing a market into monopoly or oligopoly. Or these costs of government action may be more indirect, by creating such an impression of its omnipresent role that the people become dependent on it—emotionally and physically—or no longer put the effort in to help each other, as that is “the government’s job.” And once the government acts, it stays.

Going back to the case, the Ninth Circuit explained that the district court didn’t evaluate the various state interests in having their laws applied because it dismissed all states’ interests other than California. “By applying California law to the nationwide class of indirect purchasers, the district court improperly impaired non-repealer state policy by allowing California to set antitrust enforcement policy for the entire country.”

The Ninth Circuit concluded more than one state’s law should apply to the class and the district court, on remand, should reconsider class certification after reconducting its choice of law analysis, starting at step one.

Photo: Pixabay

Contributing Advisors