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October 16, 2015
  In re Musical Instruments - Ninth Circuit
Headline: Plaintiff-class failed to plead sufficient plus factors, in conjunction with parallel conduct, to infer the plausible existence of an illegal horizontal agreement between business competitors.

Area of Law: Antitrust, Sherman Act ยง 1, Illegal Horizontal Agreements, Civil Procedure and pleading requirements under Bell Atlantic Corp. v. Twombly.

Issue Presented:
Whether plaintiffs have alleged sufficient circumstantial "plus factors," in addition to their allegations of "parallel conduct" between competing businesses, to provide a plausible basis from which to infer the existence of an illegal horizontal agreement consistent with the Supreme Court's decision in Bell Atlantic Corp. v. Twombly.

Brief Summary:
Plaintiffs filed this putative class action against five manufacturer defendants claiming the competitor manufacturers entered into agreements with one another which resulted in illegal price fixing. The United States Supreme Court has held it is a per se violation of the Sherman Antitrust Act for competitors to enter into "horizontal" agreements with one another. While plaintiffs did not have any direct evidence of such agreements, they relied on parallel business conduct, in conjunction with six "plus factors" which they claimed showed defendants colluded with one another. The Ninth Circuit panel, with Judge Pregerson dissenting, held that plaintiffs' allegations of parallel conduct, in conjunction with several "plus" factors, were insufficient to provide a plausible basis from which to infer the existence of these alleged horizontal agreements.

Significance:
Under Bell Atlantic Corp. v. Twombly, an antitrust complaint must allege sufficient 'plus factors' in addition to showing parallel conduct to support a plausible inference of a price-fixing conspiracy. Two of the three panel judges rejected plaintiffs' claim that it is plausible to infer a price-fixing conspiracy based only on their allegations that certain guitar manufacturers each adopted similar advertising policies ("parallel conduct") under circumstances that suggest the manufacturers agreed among themselves to adopt those policies ("plus factors").

Extended Summary:
In this federal class action suit, plaintiffs claimed the National Association of Music Merchants (NAMM) and the large music retail store Guitar Center conspired with five major guitar manufacturers (Fender, Gibson, Yamaha, Hoshino and Kaman hereafter "manufacturer defendants") to implement minimum-advertising price policies ("MAP policies"). The MAP policies effectively set a minimum dollar figure that each manufacturer defendant had to spend on marketing, which as a result, raised the cost of guitars. It was the plaintiff's position that each of the five manufacturer defendants agreed with one another to implement the MAP policies, while defendants maintained they did not agree with one another, but that each of them independently agreed with retailer, Guitar Center, to enact the policies.

According to the Sherman Act, retailers can enter into agreements with manufacturers but competing manufacturers cannot enter agreements with one another. These "horizontal agreements" between competing manufacturers are per se banned because they give competing market participants the ability to fix prices instead of letting the market dictate the cost of goods.

Plaintiffs claim Guitar Center pressured each of the manufacturer defendants to adopt the MAP policies and that the defendant manufactures in turn agreed amongst themselves to adopt the policies. Plaintiffs did not provide any direct evidence supporting their claims, but instead relied solely on the circumstantial fact that all manufacturer defendants did in fact initiate the MAP policies.

When a plaintiff uses circumstantial evidence of parallel conduct to bring a claim under section 1 of the Sherman Act, he must "plead enough non-conclusory facts to place that parallel conduct in a context that raises a suggestion of a preceding agreement." To meet its burden, plaintiff must plead sufficient facts to prove the companies engaged in economic actions that are mostly consistent with some coordinated action, rather than independent conduct in an interdependent economy. Put another way, whether there exists sufficient 'plus factors' that suggest the defendants entered into illegal agreements. Plaintiffs claimed there were six (6) different 'plus factors' that suggested manufacturer defendants had illegally agreed with one another to initiate the MAP policies.

Plaintiffs first claimed that each of the defendants had a common motive. The court quickly dismissed this factor as all businesses have a common motive: to increase profits and make money. The common motive of making money does not itself indicate collusion.

Next, plaintiffs claimed each of the manufacturer defendants acted against their own self-interest when they agreed to increase their minimum marketing costs by adopting MAP policies. The panel rejected this claim, finding that plaintiffs' own allegations of pressure by Guitar Center, an important customer, to adopt MAP policies provide "ample independent business reasons why each of the manufacturers adopted and enforced MAP policies even absent an agreement among the defendant manufacturers."

The plaintiff's third alleged plus factor was that each manufacturer defendant simultaneously adopted the MAP policies. However in their complaint, plaintiffs claimed the defendants adopted the policies over a number of years. The panel found that "[a]llegations of such slow adoption of similar policies does not raise the specter of collusion."

Plaintiffs' fourth plus factor suggesting an agreement among defendants was an FTC investigation of NAMM. Prior to the filing of this lawsuit, the FTC had conducted an investigation on NAMM where it held there was no purpose for NAMM members to exchange certain information (each manufacturer defendant is a member of NAMM). The panel rejected plaintiff's contention because the FTC Act, unlike the Sherman Act, does not require allegation and proof of a combination or conspiracy and, further, neither the FTC complaint nor consent decree alleged that "any group or company actually conspired or agreed to adopt MAP policies . . . ".

The fifth alleged plus factor was the mere fact that each manufacturer defendant participated in NAMM meetings. Like the first plus factor alleged, the court quickly disposed of this argument stating the mere participation in trade organizations meetings where information is exchanged does not amount to illegal agreement or conspiracy.

Lastly, plaintiffs cite as evidence of collusion the complaint's allegations that the price of guitars and guitar amplifiers rose at the same time the total number of units fell at the same time that the manufacturer defendants initiated the MAP policies. The court rejected this reasoning since the price of all guitars increased, not just guitars of the named defendants. Further, the panel's majority found that plaintiffs "did not allege any facts connecting the purported price increase to an illegal agreement among competitors. And without such a connection, there is simply no basis from which we can infer an agreement."

Rejecting the dissent's position that, "'when analyzed together,' plaintiffs' purported plus factors provide a context that plausibly suggests that 'an illicit horizontal agreement was made between the manufacturer defendants,'" the panel found that "[p]laintiffs have indeed provided a context for the manufacturers' adoption of MAP policies, but not one that plausibly suggests they entered into illegal horizontal agreements. Instead, the complaint tells a different story, one in which Guitar Center used its substantial market power to pressure each manufacturer to adopt similar policies, and each manufacturer adopted those policies as in its own interest." The panel affirmed the district courts 12(b)(6) dismissal.

To read full opinion, please visit:

http://cdn.ca9.uscourts.gov/da...15/08/25/12-56674.pdf

Panel: Harry Pregerson, Richard C. Tallman, and Carlos T. Bea, Circuit Judges.

Argument Date: October 6, 2014

Date of Issued Opinion: August 25, 2015

Docket Number: No. 12-56674

Decided: Affirmed the District Court granting defendant's 12(b)(6) dismissal.

Case Alert Author: Brian D. Shapiro

Counsel:
Daniel C. Girard, Elizabeth C. Pritzker, Amanda Steiner, Scott M. Grzenczyk (argued), Girard Gibbs LLP, San Francisco, California, for Plaintiffs-Appellants.
Margaret M. Zwisler (argued), J. Scott Ballenger, Latham & Watkins LLP, Washington, D.C.; Christopher S. Yates, Latham & Watkins LLP, San Francisco, California, for Defendant-
Author of Majority Opinion: Judge Bea
Circuit: Ninth Circuit
Case Alert Supervisor: Professor Glenn Koppel

    Posted By: Glenn Koppel @ 10/16/2015 07:06 PM     9th Circuit  

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