USS-POSCO: Ninth Circuit Articulates the Pattern Test for Establishing the Sham Exception to Noerr-Pennington Immunity
Immediately following the PRE decision, the Ninth Circuit encountered a factually similar case to California Motor, which addressed a core question: Did the “objectively baseless” test from PRE implicitly overturn or modify the California Motor “sham” test (i.e., multiple petitions with probable cause may still be a sham)? In USS-POSCO Industries v. Contra Costa County Building & Construction Trades Council, AFL-CIO, the Ninth Circuit confronted allegations that labor unions filed 29 lawsuits attempting to coerce a steel company to use unionized labor to refurbish a steel plant. The U.S. District Court for the Northern District of California found the unions’ conduct immunized, and on appeal the unions argued that under PRE a plaintiff “must show that each individual suit the unions brought was objectively baseless.”
Judge Kozinski, writing for the Ninth Circuit, disagreed, holding that PRE had not overruled California Motor and that repetitive litigation that is not objectively baseless can still amount to sham petitioning. The court ruled that PRE provides a two-step test for assessing “whether a single action constitutes sham petitioning,” whereas California Motor governs whether “a whole series of legal proceedings” is a sham, such that the cases apply to “different situations.” Under PRE, the analysis of a single case is “retrospective: If the suit turns out to have objective merit, the plaintiff can’t proceed to inquire into subjective purposes, and the action is perforce not a sham,” while under California Motor, the inquiry is “prospective: Were the legal filings made, not out of a genuine interest in redressing grievances, but as part of a pattern or practice of successive filings undertaken essentially for purposes of harassment?”
Notably, the Ninth Circuit recognized a compelling policy justification for the Supreme Court’s decision to apply different standards based, in part, on the number of challenged petitions. Because lawsuits are “invariably costly, distracting and time-consuming” and “having to defend a whole series of such proceedings can inflict a crushing burden on a business,” the court ruled that California Motor “recognized that the filing of a whole series of lawsuits and other legal actions without regard to the merits has far more serious implications than filing a single action.” As a result, the key question regarding a pattern of petitions “is not whether any one of them has merit—some may turn out to, just as a matter of chance—but whether they are brought pursuant to a policy of starting legal proceedings without regard to the merits and for the purpose of injuring a market rival.”
By the Ninth Circuit’s reasoning, “the fact that a small number in the series of lawsuits turn out not to be frivolous will not be fatal to a claim [because] . . . even a broken clock is right twice a day.” Thus, the court in USS-POSCO held that, when a pattern of petitioning is alleged, it is not necessary to inquire into whether each action is objectively baseless. Alleging and proving that a pattern of successive petitions was brought regardless of their merits in order to harass a rival “would be sufficient to overcome the [petitioner’s] Noerr-Pennington defense.” Ultimately, however, the Ninth Circuit affirmed the application of Noerr-Pennington immunity because 15 of the 29 lawsuits were successful, rendering a “batting average” above .500, which could not be “reconciled with the charge that the unions were filing lawsuits and other actions willy-nilly without regard to success.”
PrimeTime 24: Second Circuit Continues This Trend
In 2000, in PrimeTime 24 Joint Venture v. NBC, Inc., the Second Circuit reached the same conclusion as the Ninth Circuit. There, a satellite television provider filed a Section 1 claim against the major television broadcast networks and their trade association and affiliates. Under the federal statutory framework of the Satellite Home Viewership Act (SVHA), the networks were required to license their programming to satellite providers like PrimeTime if the “over-the-air” signal strength to any given customer was deficient. After PrimeTime designated which viewers it claimed the right to serve, broadcasters had the right to challenge those signal strength estimates, requiring PrimeTime to conduct a signal-strength test for every challenged household if it wanted to continue serving those customers. PrimeTime alleged that the networks over-challenged PrimeTime’s list of eligible subscribers and “intentionally abused the SHVA’s signal-strength challenge provision by filing baseless challenges for the purpose of raising PrimeTime’s cost structure and thereby reducing competition from it.”
After the district court held that the Noerr-Pennington doctrine covered the broadcast networks’ SVHA challenges as protected petitioning, the Second Circuit disagreed. Citing California Motor, the court concluded that “concerted assertion of baseless claims with the intent of imposing costs on a competing firm to prevent or impair competition from that firm . . . is predatory, without any redeeming efficiency benefitting consumers.” Because “the Noerr–Pennington doctrine does not extend to ‘every concerted effort that is genuinely intended to influence governmental action,’” the court noted that defendants “may well have engaged in a ‘pattern of baseless, repetitive’ signal-strength challenges to harm PrimeTime, even though PrimeTime itself was engaged in a pattern or practice of copyright violations.”
Like the Ninth Circuit, the Second Circuit held that the two-step PRE process for determining when a single petition constitutes a sham is distinguished from cases where defendants bring a series of legal proceedings. In the latter case, the Second Circuit agreed with the Ninth Circuit that the relevant question was whether the “legal filings [were] made, not out of a genuine interest in redressing grievances, but as part of a pattern or practice of successive filings undertaken essentially for purposes of harassment.” If so, the “relevant issue is whether the legal challenges ‘are brought pursuant to a policy of starting legal proceedings without regard to the merits and for the purpose of injuring a market rival.’” The court agreed that “it is immaterial that some of the claims might, ‘as a matter of chance,’ have merit.” Judged against this standard, the court held that PrimeTime alleged “conduct virtually identical to that deemed by the Ninth Circuit in USS–POSCO to be ‘automatic petitioning . . . without regard to and regardless of the merits of said petitions,’ that ‘if proven, would be sufficient to overcome the [defendants’] Noerr–Pennington defense.’”
Waugh Chapel: Fourth Circuit Adopts Same Approach
In 2013, the Fourth Circuit joined the Second and Ninth Circuits in ruling that a pattern of anticompetitive petitioning can lose Noerr-Pennington immunity even if individual petitions are not objectively baseless. In Waugh Chapel South, LLC v. United Food & Commercial Workers Union 27, two labor unions filed 14 legal challenges, one of which was successful, against real estate developers in an effort to prevent a shopping center from hosting a non-unionized supermarket. When the developers sued the unions for unfair labor practices, the district court held that Noerr-Pennington shielded the legal challenges because none were objectively baseless.
The Fourth Circuit reversed, “agree[ing] with the distinction adopted by our sister circuits” that, “when purported sham litigation encompasses a series of legal proceedings rather than a singular legal action . . . the sham litigation standard of California Motor should govern.” The court noted that, although it “is unclear whether PRE[] distinguished or displaced the sham litigation test first propounded in California Motor,” in “the absence of any express statement that the sham litigation standard in PRE[] supplanted California Motor,” the court was “obligated to follow the case which directly controls, leaving to the Supreme Court the prerogative of overruling its own decisions.”
The Fourth Circuit distinguished PRE “because it is ill-fitted to test whether a series of legal proceedings is sham litigation,” reasoning that, when “a party contends that it is defending a sham lawsuit, it is relatively simple for a judge to decide whether the singular claim it is presiding over is objectively baseless,” but “it is an entirely different undertaking to collaterally review—as here—fourteen state and administrative lawsuits for baselessness.” In that context, “a district court should conduct a holistic evaluation of whether the administrative and judicial processes have been abused” by the pattern of petitions. In focusing on the “pattern of the legal proceedings, not their individual merits,” a court may find relevant “the subjective motive of the litigant and the objective merits” while “other signs of bad-faith litigation … may also be probative of an abuse of the adjudicatory process.”
Applying that standard and reversing dismissal, the court noted that, “[w]hile there is no particular win-loss percentage that a litigant must achieve to secure the protection of the First Amendment, a one-out-of-fourteen batting average at least suggests a policy of starting legal proceedings without regard to the merits and for the purpose of” violating the law. The Fourth Circuit also agreed with the Ninth Circuit’s logic that a limited number of successful petitions does not rescue a pattern of sham petitions: “the fact that there may be moments of merit within a series of lawsuits is not inconsistent with a campaign of sham litigation, for even a broken clock is right twice a day.”
Hanover Realty: Third Circuit Establishes a Pattern
In 2015, the Third Circuit joined the prior three circuits, adopting the pattern exception to sham petitioning in Hanover 3201 Realty, LLC v. Village Supermarkets, Inc. There, in a split 2-1 decision, the court “agree[d] with the approach to California Motor and Professional Real Estate that has been adopted by the Second, Fourth, and Ninth Circuits,” namely that the standards “apply to different situations: California Motor to a series of sham petitions and Professional Real Estate to a single sham petition.” The Third Circuit held that a local supermarket was not protected by Noerr-Pennington after it filed four separate actions against a developer seeking administrative approval to build a competing supermarket in town.
The court stated that the “best way” to determine whether petitioning is a sham “depends on whether there is a single filing or series of filings.” With only one petition, the two-step test of PRE “places a heavy thumb on the scale in favor of the defendant” accused of sham petitioning, whereas California Motor advises that a “more flexible standard is appropriate when dealing with a pattern of petitioning.” The Third Circuit noted that, “[n]ot only do pattern cases often involve more complex fact sets and a greater risk of antitrust harm, but the reviewing court sits in a much better position to assess whether a defendant has misused the governmental process to curtail competition.” The California Motor inquiry “asks whether a series of petitions were filed with or without regard to merit and for the purpose of using the governmental process (as opposed to the outcome of that process) to harm a market rival and restrain trade.”
Following the Ninth Circuit’s broken clock analogy, the Third Circuit held that, “even if a small number of the petitions turn out to have some objective merit, that should not automatically immunize defendants from liability.” As a result, when “deciding whether there was such a policy of filing petitions with or without regard to merit, a court should perform a holistic review that may include looking at the defendant’s filing success—i.e., win-loss percentage—as circumstantial evidence of the defendant’s subjective motivations.” According to the court, “If more than an insignificant number of filings have objective merit, a defendant likely did not have a policy of filing ‘willy-nilly without regard to success,’” while a “high percentage of meritless or objectively baseless proceedings, on the other hand, will tend to support a finding that the filings were not brought to redress any actual grievances.” The Third Circuit also instructed that lower courts reviewing pattern cases “should also consider other evidence of bad-faith as well as the magnitude and nature of the collateral harm imposed on plaintiffs by defendants’ petitioning activity (e.g., abuses of the discovery process and interference with access to governmental agencies).”
In dissent, Judge Greenberg on the Third Circuit panel disagreed that California Motor required a different standard for assessing a pattern of petitions compared to PRE’s two-prong test for a single petition, noting that California Motor itself stated that “a pattern of baseless, repetitive claims” may be a sham. As a result, Judge Greenberg opined that PRE requires plaintiffs to demonstrate that each petition in a series is objectively baseless before Noerr-Pennington immunity is lost. In 2016, the Supreme Court denied defendant’s petition for certiorari. At that time, however, there was no split in the circuits on the treatment of a pattern of petitions.
PRTC: First Circuit Bucks the Trend
In the first break with the prior four circuits, the First Circuit in 2017 expressed doubt as to whether California Motor established a separate standard for immunity than PRE. In Puerto Rico Telephone Company v. San Juan Cable LLC, a telephone company (PRTC) filed a monopolization case against a cable company (OneLink) for filing 24 petitions to a regulatory board and other tribunals in an effort “to deny, slow down or otherwise impede PRTC’s efforts” to secure a license to offer a competing TV service. The U.S. District Court for the District of Puerto Rico granted summary judgment on the basis that Noerr-Pennington immunized the defendant because all of its petitions were objectively reasonable, even though “none resulted in a meaningful victory.”
On appeal, the First Circuit rejected the argument that California Motor applied to defendants’ 24 petitions. The court acknowledged that “opinions of the four circuits to have addressed similar arguments directly—all in one way or another adopt some variant of this view” that California Motor applies when “the defendant’s decision to file the series of petitions paid no heed to whether they had merit.” The court was “quite skeptical of the notion that a defendant’s willingness to file frivolous cases may render it liable for filing a series of only objectively reasonable cases” and “less skeptical[] than [its sister circuits] . . . that PRE[] does not apply fully to the filing of a series of suits.”
The First Circuit explained that, “where a party files a large number of petitions––here twenty-four according to PRTC––and every single one is objectively reasonable, we struggle to see how a jury could reasonably conclude that the party was filing petitions ‘regardless of the merits of the cases.’” The court reasoned that “[o]ne large lawsuit or intervention in an agency proceeding can impose much more of a burden on a competitor than might a series of smaller claims.” The court also noted that, “while [it] can see the logic inherent in reasoning that a nonfrivolous suit might be viewed differently when flown in a flock of frivolous suits, [it] see[s] little logic in concluding that an exercise of the right to file an objectively reasonable petition loses its protection merely because it is accompanied by other exercises of that right.” As a result, the First Circuit affirmed the grant of summary judgment, “accept[ing] that Noerr- Pennington immunity applied to each petition because of its objective reasonableness, not because of its causal role.”
In a concurrence, two judges noted that the majority opinion “leaves open the possibility that, PRE[] notwithstanding, a monopolist might be liable under the antitrust laws for engaging in a pattern of petitioning, even though no single filing in that pattern is objectively baseless.” They did not explain, however, in what circumstances a pattern of objectively reasonable petitions could lose Noerr-Pennington immunity, and joined the majority opinion that PRE’s objectively baseless test determines whether repetitive petitioning is a sham. In 2018, PRTC’s certiorari petition was denied.
U.S. Futures Exchange: Seventh Circuit Joins First Circuit in Rejecting Separate Sham Test Under California Motor for Pattern of Petitioning
In March 2020, the Seventh Circuit entered the fray in a case involving commodities and futures trading, U.S. Futures Exchange, LLC v. Board of Trade of the City of Chicago, Inc. When a nascent electronic trading exchange, U.S. Futures Exchange (USFE), applied for regulatory approval from the U.S. Commodity Futures Trading Commission, two incumbent exchanges filed 54 objections to the USFE’s application and requested postponement of the CFTC’s hearing on the application. After the new trading exchange failed, it sued the two incumbent exchanges for causing its delayed entry and subsequent failure. The U.S. District Court for the Northern District of Illinois held the incumbents’ petitioning immune under Noerr-Pennington, relying on PRE.
The Seventh Circuit affirmed, “stand[ing] with the First Circuit” and rejecting the argument that “California Motor provides a separate rubric to use whenever a ‘pattern’ of sham filings is alleged.” Like the First Circuit, the Seventh Circuit decided to split from the four circuits that had “adopt[ed] some version of the view that PRE applies only to single-lawsuit cases while California Motor applies to all others.” The Seventh Circuit held there was no need to “reconcile” PRE and California Motor because the objective reasonableness portion of the sham exception is “indispensable” and, echoing PRTC, that there is “‘little logic’ in concluding a petitioner loses the right to file an objectively reasonable petition merely because it chooses to exercise that right more than once in the course of pursuing its desired outcome.” Finally, the court held, in the alternative, that, “[e]ven if PRE and California Motor provided two different standards for non-pattern and pattern cases,” the plaintiff’s case did not involve a pattern of petitioning because defendants’ 54 filings in one CFTC approval proceeding did not “transform [that] one . . . proceeding into many.” Applying PRE, the court concluded that defendants’ petitioning was objectively reasonable, justifying the grant of immunity. USFE did not appeal the decision to the Supreme Court.
CSMN Investments: Tenth Circuit Acknowledges “California Motor Sham Test”
A month later, in April 2020, the Tenth Circuit adopted the Third Circuit’s interpretation of California Motor in a non-antitrust context, and held that the “California Motor Sham Test” applied to its consideration of a real estate developer’s civil rights action in a property zoning dispute. In CSMN Investments, the U.S. District Court for the District of Colorado had dismissed the plaintiff’s case against a local homeowners association and government entity that sought to block approval of an addiction treatment center in its community. On appeal, the Tenth Circuit affirmed that the plaintiff had not met the two-step PRE test for sham petitioning because the defendants’ conduct before a county commission, a state trial court, and appeals court was objectively reasonable, even if mostly unsuccessful.
The Tenth Circuit also held that the defendants’ “conduct [did] not qualify for the California Motor sham exception.” Quoting Waugh Chapel, the court noted that under California Motor “sham litigation occurs where a pattern of baseless, repetitive claims ... emerge[s] which leads the factfinder to conclude that the administrative and judicial processes have been abused.” The court found, however, that the defendants’ conduct before three tribunals was part of the same case and did not constitute multiple petitioning, so the defendants had not “engaged in a series of lawsuits that were intended to abuse judicial processes” and, therefore, were afforded the immunity of the Petition Clause.
Supreme Court Will Have to Resolve Split over When a Pattern of Petitions Constitutes a Sham
Every year, Noerr-Pennington immunity arises in a wide array of contexts. California Motor established that a pattern of petitions brought “with or without probable cause, and regardless of the merits of the cases” could deprive a petitioner of Noerr-Pennington immunity. PRE held that a petition brought with probable cause is, by definition, objectively reasonable and not a sham, and therefore excepted from antitrust scrutiny. Lower courts, however, have split over whether the Supreme Court’s decision in California Motor means that there are separate standards: one for sham petitioning when multiple petitions are at issue (California Motor) and one for sham petitioning when there is only a single claim (PRE).
On one side of the split, five circuits have embraced California Motor’s “flexible” test for a pattern of petitioning by looking holistically at the subjective purpose and effect of the overall pattern, without an inspection of the objective merit of each individual petition, to determine whether serial litigation “without regard to the merits” has been improperly used as an economic weapon and is a sham subject to antitrust scrutiny. These circuits hew more closely to the concurrence by Justice Stevens in PRE that “[r]epetitive filings, some of which are successful and some unsuccessful, may support an inference that the process is being misused,” and, therefore, that a different rule should “govern the decision of difficult cases, some of which may involve abuse of the judicial process,” since “objectively reasonable lawsuits may still break the law.”
On the other side of the split, two circuits, following PRE, appear to require that at least one petition in a pattern must be considered objectively baseless for serial petitioning to lose antitrust immunity. According to PRTC, a litigant can lose every petition and still be shielded from antitrust scrutiny so long as each of those petitions is not objectively baseless.
Of note, both federal antitrust enforcement agencies have referred to PRE and California Motor as providing separate and distinct standards for invoking the Noerr-Pennington doctrine, based on whether a single or a series of petitions are challenged. The DOJ, in a December 2020 amicus brief in a recent Seventh Circuit appeal, noted that “drawing on California Motor, some courts have applied a separate standard when the alleged anticompetitive conduct consists of a series of petitions, instead of a single petition.” The DOJ’s brief quoted three of the circuits which have invoked the California Motor test for serial petitioning, but did not opine on the propriety of those courts’ application of that test instead of PRE. In 2006, the FTC staff issued a report supporting the California Motor standard, and stated that “a pattern of repetitive petitions filed without regard to merit and for the sole purpose of using the government process, rather than the outcome of the process, to harm directly marketplace rivals and suppress competition should be subject to antitrust liability without the requirement that each underlying filing meet PRE’s standard for objective baselessness.”
The Supreme Court missed the opportunity to resolve the circuit split when certiorari was denied in the PRTC case and not sought by the losing side in U.S. Futures Exchange. Predictions about how the circuit split will be resolved, should cert be granted, are beyond the purview of this article. Until the Supreme Court explains whether a pattern of petitions can be considered sham litigation even where none of the petitions are objectively baseless, a competitor that determines that the benefits from filing repetitive but reasonable petitions outweighs the litigation costs will have an incentive to engage in serial petitioning. Meanwhile, antitrust plaintiffs who anticipate that serial petitioners will raise a Noerr-Pennington defense will likely center their claims in the five federal circuits which have accepted that the California Motor sham test applies to a series of petitions because in those jurisdictions, as the Third Circuit has noted, a plaintiff can “more easily overcome Noerr-Pennington immunity when the defendant ha[s] engaged in multiple legal actions against the plaintiff,” given the “more flexible standard” and “holistic review” of the California Motor test compared with PRE’s “exacting two-step test.”