From Law360: Strategies for Protecting Market Share, Part 3

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(Editor’s Note: Law360 has published a four-part series on protecting market share, written by Jeffrey Gould, general counsel for The Saint Consulting Group, and The Saint Report is republishing the series over the next few weeks).

By Jeffrey R. Gould, The Saint Consulting Group
Many companies increasingly use grassroots political techniques and strategic litigation to actively generate opposition against a competitor’s project and protect their market share. This series of Law360 Expert Analysis articles has broad implications in competitive commercial real estate battles across virtually every industry and sector.

The articles describe how recent court rulings upholding rights of citizens to petition their government provide companies with highly effective strategies to prevent competitors from gaining a foothold even when the underlying motive is protecting market share and eliminating opposition.If companies understand how this is done and what the boundaries are, they can take steps to stop a competitor from destroying a strategic project. These articles are intended as a tool to help educate business leaders on highly effective and legally permissible strategies to protect market share and how to spot when it is being used against you.Part 1 summarized the impact of U.S. Supreme Court rulings on the First Amendment’s right to petition clause and recent protections against strategic lawsuits against public participation from developers; Part 2 explored the legal foundation provided by the first two Supreme Court cases on Noerr and Pennington; part 3 shows how the Supreme Court clarified and expanded the legal foundation of the Noerr-Pennington doctrine; and part 4 will provide new insights from recent lower court rulings that expand the right-to-petition clause.Environmental protests, public hearings, petition drives, social media tweets and websites all provide ways for the public to comment or object to a development proposal in their community.

Opponents may include local residents, unions, groups philosophically opposed to a project and competitors, any of whom may choose to file lawsuits against developers, planning board decisions, state health and environmental authorities and other groups trying to influence the outcome of the development.

They all enjoy access to the courts as but one aspect of the First Amendment’s right to petition, expanded since 1961 by U.S. Supreme Court decisions known as the Noerr-Pennington doctrine (see parts 1 and 2 of this series). The courtroom can also tempt litigants to file lawsuits later found as sham, meritless or frivolous that aim solely to delay projects. These are not protected by the Noerr-Pennington doctrine.

The court clarified and expanded the doctrine to address whether a petitioner’s conduct is valid and protected, in California Motor Transport Co. v. Trucking Unlimited, 404 U.S. 508 (1972) and defined what is sham litigation in PREI v. Columbia Pictures, 508 U.S. 49 (1993), both of which are discussed today.

In California Motor Transport, the court added that the right to petition extends to all departments of the government and the right of access to the courts is indeed but one aspect of the right of petition. Pursuant to this doctrine, immunity extends to attempts to petition all departments of the government. If conduct constitutes valid petitioning, the petitioner is immune from antitrust liability whether or not the injuries are caused by the act of petitioning or are caused by government action which results from the petitioning. A series of meritless lawsuits that are intended solely to delay projects are not protected by the Noerr-Pennington doctrine.

Finally, the PREI case provides a detailed definition of the “sham” exception to the doctrine of antitrust immunity first identified in Eastern Railroad Presidents Conference v. Noerr Motor Freight, as that doctrine applies in the litigation context.

California Motor Transport Co. et al. v. Trucking Unlimited et al. 404 U.S. 508 (1972)

This lawsuit was brought under the Clayton Act in U.S. District Court for the Northern District of California, alleging that the defendant highway carriers had conspired to put the plaintiff highway carriers out of business as competitors by instituting repeated objections in state and federal proceedings to resist and oppose the plaintiffs’ applications concerning operating rights. More critical are other allegations, which elaborate on the “sham” theory first mentioned in the Noerr decision, by asserting that the power, strategy, and resources of the petitioners were used to harass and deter respondents in their use of administrative and judicial proceedings so as to deny them “free and unlimited access” to those tribunals.

The result, it is alleged, was that the machinery of the agencies and the courts was effectively closed to respondents, and petitioners indeed became the regulators of the grants of rights, transfers and registrations to respondents — thereby depleting and diminishing the value of the businesses of respondents and aggrandizing petitioners’ economic and monopoly power. It is alleged that petitioners “instituted the proceedings and actions … with or without probable cause, and regardless of the merits of the cases.”

This case is similar to Eastern Railroad Presidents Conference v. Noerr Motor Freight, 365 U.S. 127, where a group of trucking companies sued a group of railroads to restrain them from an alleged conspiracy to monopolize the long-distance freight business in violation of the antitrust laws and to obtain damages. There the court held that no cause of action was alleged insofar as it was predicated upon mere attempts to influence the legislative branch for the passage of laws or the executive branch for their enforcement. The court followed that view in United Mine Workers v. Pennington, 381 U.S. 657, 669 -671. Based on the foregoing authority, the district court dismissed California Motor Transport’s complaint for failure to state a cause of action, but the U.S. Court of Appeals for the Ninth Circuit reversed (432 F2d 755).

On certiorari, the U.S. Supreme Court affirmed the court of appeals’ judgment and remanded the case for trial. Justice William Douglas, expressing the majority view, said the court ruled that the same philosophy governs the approach of citizens or groups of them to administrative agencies (which are both creatures of the legislature, and arms of the executive) and to courts, the third branch of government. Certainly the right to petition extends to all departments of the government.

The right of access to courts is indeed but one aspect of the right of petition. See Johnson v. Avery, 393 U.S. 483, 485; Ex parte Hull, 312 U.S. 546, 549. The nature of the views pressed does not determine whether First Amendment rights may be invoked; but they may bear upon a purpose to deprive the competitors of meaningful access to the agencies and courts. As stated in the opinion concurring in the judgment, such a purpose or intent, if shown, would be “to discourage and ultimately to prevent the respondents from invoking” the processes of the administrative agencies and courts and thus fall within the “sham” exception to Noerr.

Accordingly, the court held that (1) although highway carriers, as part of the right of petition protected by the First Amendment, had right of access to agencies and courts to be heard on applications sought by competitive highway carriers, they were not thereby given immunity from the antitrust laws, and (2) a violation of the antitrust laws would be established if the plaintiffs’ allegations were proved as facts, particularly allegations that defendants, through massive, concerted, and purposeful group activities, had combined to deter the plaintiffs from having “free and unlimited access” to agencies and courts, whether the means used by the defendants might have been lawful was immaterial.

Justice Potter Stewart and Justice William Brennan concurred in the result, stating that (1) absent the defendants’ involvement in perjury, fraud, bribery, or misrepresentations to the tribunals involved, none of which conduct was alleged, their joint exercise of the constitutional right of access to the tribunals was immune from the antitrust laws, but (2) the case should be remanded for trial, since under certain allegations, liberally construed, the plaintiffs were entitled to prove that the defendants’ real intent was not to invoke the processes of the administrative agencies and courts, but to discourage and prevent the plaintiffs from invoking those processes, which intent would make the conspiracy an attempt to interfere directly with the business relationships of a competitor, justifying application of the Sherman Act.

PREI Inc. et al. v. Columbia Pictures Inc., et al. 508 U.S. 49 (1993)

This case best defines the “sham” exception to the doctrine of antitrust immunity first identified in Eastern Railroad Presidents Conference v. Noerr Motor Freight Inc., 365 U.S. 127 (1961). Under the sham exception, activity “ostensibly directed toward influencing governmental action” does not qualify for Noerr immunity if it “is a mere sham to cover … an attempt to interfere directly with the business relationships of a competitor.” Id. at 144.

Petitioner PREI operated a resort hotel in Palm Springs, Calif., where they installed videodisc players in hotel rooms and a library of more than 200 motion picture titles that guests could rent. PREI sought to develop a market to sell videodisc players to other hotels wishing to offer in-room viewing of prerecorded material. Respondent Columbia held copyrights to the motion pictures recorded on the videodiscs that PREI purchased. Columbia also licensed transmission of copyrighted motion pictures to hotel rooms through a wired cable system called Spectradyne. PREI therefore competed with Columbia not only for the viewing market at its hotel, but also for the broader market for in-room entertainment services in hotels.

In 1983, Columbia sued PREI for copyright infringement through the rental of videodiscs for viewing in hotel rooms. PREI counterclaimed, charging Columbia with violations of the Sherman Act, 26 Stat. 209, as amended, 15 U.S.C. 1-2, and various state law infractions. In particular, PREI alleged that Columbia’s copyright action was a mere sham to cover up acts of monopolization and conspiracy to restrain trade.

The parties filed cross-motions for summary judgment on Columbia’s copyright claim and postponed further discovery on PREI’s antitrust counterclaims. Columbia did not dispute that PREI could freely sell or lease lawfully purchased videodiscs under the Copyright Act’s “first sale” doctrine, see 17 U.S.C. 109(a), and PREI conceded that the playing of videodiscs constituted “performance” of motion pictures, see 17 U.S.C. 101 (1988 ed. and Supp. III).

As a result, summary judgment depended solely on whether rental of videodiscs for in-room viewing infringed Columbia’s exclusive right to “perform the copyrighted works publicly.” Ruling that such rental did not constitute public performance, the district court entered summary judgment for PREI. The court of appeals affirmed on the grounds that a hotel room was not a “public place,” and that PREI did not “transmit or otherwise communicate” Columbia’s motion pictures.

On remand, Columbia sought summary judgment on PREI’s antitrust claims, arguing that the original copyright infringement action was no sham, and was therefore entitled to immunity under Eastern Railroad Presidents Conference v. Noerr Motor Freight Inc., supra. Reasoning that the infringement action “was clearly a legitimate effort and therefore not a sham,” the district court granted the motion.

The court of appeals affirmed, characterizing “sham” litigation as one of two types of “abuse of … judicial processes,” either “misrepresentations … in the adjudicatory process” or the pursuit of “a pattern of baseless, repetitive claims” instituted “without probable cause, and regardless of the merits.” 944 F.2d at 1529 (quoting California Motor Transport Co. v. Trucking Unlimited, 404 U.S. 508, 513 , 512 (1972)).

PREI neither “alleged that the copyright lawsuit involved misrepresentations” nor “challenged the district court’s finding that the infringement action was brought with probable cause, i.e., that the suit was not baseless.” 944 F.2d, at 1530. Rather, PREI opposed summary judgment by arguing that “the copyright infringement lawsuit was a sham because Columbia did not honestly believe that the infringement claim was meritorious.” Ibid.

The court of appeals rejected PREI’s argument that “subjective intent in bringing the suit was a question of fact precluding entry of summary judgment.” Ibid. Instead, the court reasoned that the existence of probable cause “precluded the application of the sham exception as a matter of law” because “a suit brought with probable cause does not fall within the sham exception to the Noerr-Pennington doctrine.” Id. at 1531, 1532.

Finally, the court observed that PREI’s failure to show that “the copyright infringement action was baseless” rendered irrelevant any “evidence of Columbia’s subjective intent.” Id. at 1533, and rejected PREI’s request for further discovery on Columbia’s intent.

The Supreme Court ruled that the court of appeals properly affirmed summary judgment for Columbia on PREI’s antitrust counterclaim. Under the objective prong of the sham exception, the court agreed with the court of appeals that sham litigation must constitute the pursuit of claims so baseless that no reasonable litigant could realistically expect to secure favorable relief. See 944 F.2d, at 1529.

The existence of probable cause to institute legal proceedings precludes a finding that an antitrust defendant has engaged in sham litigation. When a court has found that an antitrust defendant claiming Noerr immunity had probable cause to sue, that finding compels the conclusion that a reasonable litigant in the defendant’s position could realistically expect success on the merits of the challenged lawsuit.

Therefore, a proper probable cause determination irrefutably demonstrates that an antitrust plaintiff has not proved the objective prong of the sham exception, and that the defendant is accordingly entitled to Noerr immunity. A court could reasonably conclude that Columbia’s infringement action was an objectively plausible effort to enforce rights, and therefore, the court concluded that PREI failed to establish the objective prong of Noerr’s sham exception, and affirmed the judgment of the Court of Appeals.

Significantly, PREI established that to be a “sham,” litigation must meet a two-part definition. First, the lawsuit must be objectively baseless in the sense that no reasonable litigant could realistically expect success on the merits. Only if challenged litigation is objectively meritless may a court examine the litigant’s subjective motivation. Under this second part of the definition, a court should focus on whether the baseless suit conceals “an attempt to interfere directly” with a competitor’s business relationships, Noerr, supra, at 144, through the “use of the governmental process — as opposed to the outcome of that process — as an anticompetitive weapon,” Columbia v. Omni Outdoor Advertising Inc., 499 U.S. 365, 380 (1991). This two-tiered process requires a plaintiff to disprove the challenged lawsuit’s legal viability before the court will entertain evidence of the suit’s economic viability.

It is unclear whether PREI distinguished or displaced the sham litigation test first propounded in California Motor. Two of our sister circuits, however, “reconcile” the two cases “by reading them as applying to different situations. Professional Real Estate Investors provides a strict two-step analysis to assess whether a single action constitutes sham petitioning … California Motor Transport deals with the case where the defendant is accused of bringing a whole series of legal proceedings.” USS–POSCO Indus. v. Contra Costa Cnty. Bldg. & Const. Trades Council, AFL–CIO (“POSCO ”), 31 F.3d 800, 810–11 (9th Cir.1994); accord Primetime 24 Joint Vent. v. Nat’l Broad. Co., 219 F.3d 92, 101 (2d Cir.2000).

In part 4 we will examine two recent decisions from the Seventh Circuit entitled Mercatus Group v. Lake Forest Hospital (7th Cir. 2011) and Rubloff Development v. Supervalu and the Saint Consulting Group, 2013 U.S. Dist. LEXIS 15239 (D. Ill. 2013), to explore expanded protections of the First Amendment’s right to petition clause.

—By Jeffrey R. Gould, The Saint Consulting Group

Jeffrey Gould is general counsel of The Saint Consulting Group, a land use political consultancy.

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