By E. Darius Sturmer, J.D.
Hub-and-spoke conspiracy claims dismissed because vertical components necessitated a rule of reason analysis.
A manufacturer of irrigation equipment, along with two distributors it partly owned, did not adequately allege a per seviolation of the Sherman Act or California Cartwright Act by a rival manufacturer in their complaint, which claimed that the defending manufacturer instigated a “hub-and-spoke” conspiracy among both manufacturers and distributors to boycott them. The conspiracy they alleged was premised upon vertical agreements between manufacturers and distributors—in which the manufacturers agreed to boycott the plaintiff distributors in return for the distributors agreeing to boycott the plaintiff manufacturer—and vertical agreements involving boycotts had to be analyzed under the rule of reason. Noting that the legal inquiry under the Cartwright Act mirrored analysis under federal law, the federal district court in Fresno, California, granted the defendant’s motion to dismiss with leave to amend, and it strongly encouraged the plaintiffs to refile and pursue their claims under that legal theory instead (Jain Irrigation, Inc. v. Netafim Irrigation, Inc., May 14, 2019, Drozd, D.).
Parties. The complaining manufacturer, Jain Irrigation, Inc. makes and sells drip and micro-irrigation equipment. Through an affiliated holding company, Jain in April 2017 bought an ownership stake in two distributors serving Central California, Plaintiffs Irrigation Design & Construction LLC (IDC) and Agri-Valley Irrigation (AVI). IDC and AVI are described by the court as companies that not only design, engineer, fabricate, install, and maintain agricultural irrigation systems but also sell irrigation supplies and parts at retail locations in California.
The plaintiffs alleged that the defendant, Netafim Irrigation, Inc., recruited other manufacturers to join it in refusing to sell to AVI and IDC as punishment for getting into the distribution market. They contended that Netafim had pressured its rival manufacturers through talk of Jain “crossing the line” and “breaking the rules” prohibiting manufacturers from selling directly to growers, and then with the help of its rivals’ parallel actions, had threatened and pressured numerous distributors into reducing or eliminating their purchases from Jain. The plaintiffs described a “hub and spoke” conspiracy in which Netafim and the conspiring manufacturers were the hub, the distributors were the spokes, and the rim was the agreement among the distributors to refuse to buy from Jain and to prevent AVI and IDC from obtaining the conspiring manufacturers’ products.
Theories of liability. Noting that the plaintiffs specifically asserted their antitrust claims exclusively on a per se theory of liability, the court explained that it was confining its analysis to the question of whether the first amended complaint sufficiently stated a per se violation of antitrust law, not a violation under the rule-of-reason theory of liability. The trouble with this approach, the court immediately identified, was that the structure of the conspiracy alleged involved both horizontal agreements among manufacturers and vertical agreements between manufacturers and distributors, and the Ninth Circuit had made clear in In re Musical Instruments & Equip. Antitrust Litig., 798 F.3d 1186 (9th Cir. 2015) that “where a hub-and-spoke conspiracy involve[d] both horizontal and vertical agreements,” it was “broken into its constituent parts.”
The proper approach under In re Musical Instruments was to analyze the horizontal agreements using a per se approach and the vertical agreements under the rule of reason, the court said. However, the conspiracy alleged by the plaintiffs was unavoidably premised upon vertical agreements between manufacturers and distributors. Thus, even if proven, it did not amount to a per se violation, in the court’s view. “[T]he law is clear that vertical agreements involving boycotts “must be analyzed under the rule of reason” the court added. Therefore, the conspiracy alleged by the plaintiffs “simply [was] not susceptible to per se treatment under controlling law,” the court concluded.
The case is No. 1:18-01311-DAD-BAM.
Attorneys: Andrew Peter Rausch, Jr. (Law Offices of A. Peter Rausch, Jr.) for Jain Irrigation, Inc. Kendall H. MacVey (Best Best & Krieger LLP) for Netafim Irrigation, Inc.
Companies: Jain Irrigation, Inc.; Netafim Irrigation, Inc.
MainStory: TopStory Antitrust CaliforniaNews
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