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Fourth Circuit Allows Group Boycott Claims to Proceed in SD3, LLC v. Black & Decker
Practical Law Legal Update w-000-5937 (Approx. 5 pages)
Fourth Circuit Allows Group Boycott Claims to Proceed in SD3, LLC v. Black & Decker
by Practical Law Antitrust
| Published on 18 Sep 2015 • USA (National/Federal) |
The US Court of Appeals for the Fourth Circuit reversed the district court's dismissal of plaintiffs' claims in SD3, LLC v. Black & Decker (U.S.) Inc., holding that the plaintiff submitted sufficient evidence of a group boycott against its saw safety technology to survive a motion to dismiss.
On September 15, 2015, the US Court of Appeals for the Fourth Circuit in SD3, LLC v. Black & Decker (U.S.) Inc. vacated a district court order dismissing the case, finding that the plaintiff provided sufficient evidence of a group boycott against its saw safety technology to survive a motion to dismiss (No. 14-1746, (4th Cir. Sept. 15, 2015)).
Background
In SD3, plaintiffs SD3 and its subsidiary SawStop LLC alleged that a group of saw manufacturers violated Section 1 of the Sherman act when they engaged in:
- A group boycott against plaintiffs' saw safety technology (active injury mitigation technology (AIMT)), designed to protect hand and finger injuries on table saws.
- A conspiracy with standard-setting organization Underwriters Laboratories (UL) to reject plaintiffs' attempt to standardize AIMT.
- A conspiracy with UL to enact contrived, ineffective safety standards to impose unnecessary costs on plaintiffs in modifying their AIMT technology.
In July 2014, the US District Court for the Eastern District of Virginia dismissed the complaint, finding that:
- Some defendants had attempted to deal with plaintiffs, precluding a refusal to deal claim.
- Plaintiffs failed to allege illegal conduct for several defendants, instead grouping all defendants into one complaint.
- Plaintiffs' only direct evidence of an agreement was not persuasive. The court found that the evidence in question, testimony of a defendant company engineer, only supported finding that some defendants formed a joint venture to develop table saw safety technology.
- Plaintiffs did not establish harm from any of the conspiracies because they failed to establish motivation for the conspiracies.
- Defendants' alleged standard-setting conspiracies could have arisen out of ordinary course of business and involvement in trade shows.
Appellate Decision
On appeal, the Fourth Circuit vacated the district court's decision on the group boycott claim and upheld the dismissal of the standard-setting conspiracy claims. The court reasoned that under Bell Atlantic Corp. v. Twombly, at the motion to dismiss stage the plaintiffs' allegations need only support a plausible suggestion of an agreement (550 U.S. 544 (2007)). The court explained that the district court erred in dismissing the case by:
- Finding that plaintiffs' allegations did not tend to exclude independent action, a summary judgment-stage standard inappropriate at the motion to dismiss stage.
- Applying a standard of probability rather than plausibility.
Citing lack of factual allegations against seven of the defendants, including some corporate parents, the court dismissed all counts for those defendants.
Group Boycott
The court found that plaintiffs adequately alleged sufficient evidence to support a plausible suggestion of a group boycott. The court explained that the plaintiffs supplied sufficient evidence of:
- Parallel conduct.
- Plus factors to support the plausibility of parallel conduct.
Parallel Conduct
The court found that plaintiffs plausibly alleged parallel conduct. The court disagreed with the district court's finding that defendants' conduct was dissimilar, as some defendants entered preliminary agreements with plaintiffs and some did not, and therefore not parallel conduct. The court explained that although some defendants entered preliminary agreements for AIMT, an agreement to keep AIMT off the market could have manifested in many ways, including:
- Entering spurious licensing discussions.
- Signing an agreement and never implementing the technology.
The court noted that commercially sophisticated parties, like defendants, would likely avoid a total refusal to deal, which may have raised red flags. The court also noted that at least two defendants abruptly ended their negotiations without sufficient explanation after the alleged agreement to boycott AIMT was launched, which could signal that the defendant's actions were not wholly independent.
Plus Factors
The court found that plaintiffs sufficiently alleged various plus factors to support the plausibility of parallel conduct in the form of a group boycott, including:
- The specific time, place and manner in which the boycott agreement formed.
- Six specific individuals that participated in forming the boycott and which defendant each individual represented.
- How the boycott agreement was cemented (a majority vote).
- How the boycott agreement was to be implemented, including by:
- refusing to respond to plaintiffs' communications;
- ceasing communications after long negotiations; and
- offering only bad-faith terms intended for rejection.
- Several communications between the defendants, including phone calls, meetings and discussions, which the court notes may have provided the opportunity to conspire.
- An agreement among the defendants to cover up their actions, which could suggest a guilty conscience.
The court noted that plaintiffs also provided the motivation for the agreement. Plaintiffs alleged that defendants feared that if one manufacturer adopted AIMT and the others did not, the non-adopting manufacturers may be exposed to product liability for selling unsafe products.
The court also explained that a concentrated market, like the table saw market, may facilitate coercion.
Twombly
The court stated that plaintiffs' complaint differs from the complaint at issue in Twombly, in which the US Supreme Court addressed a motion to dismiss parallel conduct and found the allegations to be insufficient. Twombly stated that plaintiffs must supply enough facts to plausibly suggest an agreement among the defendants. Twombly further asserted that parallel conduct that could be just as consistent with independent action was not sufficient to suggest a conspiracy.
The court explained that in this case, plaintiffs' allegations met the Twombly standard because they did not rely on allegations of parallel conduct alone, but instead provided significant plus factors to support the plausibility of an anticompetitive agreement.
Standard-setting Conspiracies
The court upheld the district court's dismissal of both conspiracy claims related to standard-setting. The court found that plaintiffs were unable to plausibly establish facts beyond ordinary participation in the standard-setting process. The court explained that to show a violation of antitrust law in the standard-setting process, plaintiffs would have to show that:
- The standard-setting organization's normal procedures were thwarted.
- Defendants engaged in external misconduct.
The court noted that misconduct cannot be inferred just because a representative of defendant's company sits on a standard-setting panel.
Dissent
Judge Wilkinson issued a dissent criticizing the opinion for misapplying Twombly. Judge Wilkinson argued that Twombly instructed courts to give deference to legitimate business conduct. Judge Wilkinson explained that defendants' behavior was normal marketplace behavior and that the majority's finding of parallel conduct warranting antitrust scrutiny may:
- Chill independent, market-driven behavior.
- Impose large discovery costs on companies without confidence in the claims against them.
For more information on conspiracies and parallel conduct, see Practice Note, Establishing an Agreement under Section 1 of the Sherman Act. For more information on the requirements of Twombly, see Practice Note, Twombly's Effect on Antitrust Pleading Standards. For more information on group boycotts, see Practice Note, Concerted Refusals to Deal.