9th Circuit calls into question viability of future nationwide class of indirect purchasers

On September 29, the 9th U.S. Circuit Court of Appeals vacated a district court's order certifying a nationwide class of up to 250 million indirect purchasers of cellphones in an antitrust action brought under the Sherman Act and California state law. See Stromberg et al. v. Qualcomm, Inc., 2021 DJDAR 10215. While the panel remanded the case for further class certification proceedings, leaving open the possibility that the district court could again certify the proposed class, the court's opinion raises serious doubts as to whether a nationwide class of indirect purchasers can ever be certified in the 9th Circuit as a Federal Rule of Civil Procedure 23(b)(3) damages class under the antitrust laws.

The plaintiffs are consumers who bought cellphones. They seek to represent a nationwide class of cellphone purchasers. The plaintiffs allege that Qualcomm, a maker of semiconductor devices known as modem chips, maintained a monopoly in the market for these chips by, among other things, charging excessive royalty rates to other companies. The plaintiffs allege that these excessive royalty rates harmed consumers because these inflated costs were passed on through the distribution chain to consumers in the form of either higher prices or reduced quality in cellphones.

Under this theory, the plaintiffs -- and the class of consumers they seek to represent -- are not "direct purchasers," i.e., those who buy the relevant product directly from the alleged antitrust violator. Rather, they are "indirect purchasers," meaning they purchase the relevant product from a middleman or through a distribution chain. The direct vs. indirect purchaser distinction is important because the Supreme Court has long held that indirect purchasers are barred from seeking damages for alleged violations of the Sherman Act, the federal antitrust law. State antitrust law, however, is mixed on this issue. Thirty-five states -- including California and the District of Columbia -- allow indirect purchasers to seek damages under their state antitrust laws. We will call these states "Indirect Purchaser States." In contrast, 15 states follow the federal rule and do not permit indirect purchasers to recover damages under state antitrust laws. We will call these "Direct Only States."

In this case, the plaintiffs sought certification of a nationwide damages class under the Cartwright Act -- California's state antitrust law that permits indirect purchasers to seek damages. (The plaintiffs also sought certification of an injunctive relief class under Rule 23(b)(2), but this article focuses solely on the issues relating to the Rule 23(b)(3) damages class.)

District Court Certifies Nationwide Damages Class

To certify a damages class under Rule 23(b)(3), a court must find that "the questions of law or fact common to class members predominate over any questions affecting only individual members." As the 9th Circuit describes it, this rule "tests whether proposed classes are sufficiently cohesive to warrant adjudication by representation." Hanlon v. Chrysler Corp., 150 F.3d 1011, 1022 (9th Cir. 1998).

The key "predominance" inquiry in this case concerned whether the court could apply California's Cartwright Act to a nationwide class of consumers, many of whom live in other states and purchased their cellphones outside of California. That is because "variance in state law [can] overwhelm common issues and preclude predominance for a single nationwide class." Mazza v. Am. Honda Motor Co., 666 F.3d 581, 596 (9th Cir. 2012). In other words, if the court has to apply 50 different states' laws depending on where a given class member lives or purchased their cellphone, then a nationwide class is not sufficiently cohesive to warrant class treatment.

Under California's choice-of-law rules, which apply here because the plaintiffs brought state claims in federal court, California substantive law cannot apply to the class claims of non-California residents if the interests of other states in having their laws apply outweigh California's interests in having its law apply. To decide whether the interests of other states outweigh California's interests, California employs a three-step governmental interest test. First, the court determines whether the relevant law of each of the potentially affected jurisdictions is the same or different with regard to the particular issue in question. Second, if there is a difference, the court examines each jurisdiction's interest in having its own law applied to determine whether a true conflict exists. Third, if there is a true conflict, the court compares the nature and strength of each jurisdiction's interest to determine which state's interest would be more impaired if its policy was subordinated to that of the other state.

Here, the district court determined that it could apply California's Cartwright Act to a nationwide class of consumers. Under the first prong of the test, the court concluded that the antitrust laws of Direct Only States are materially different from Indirect Purchaser States, including California. Under the second prong, the court concluded that California has an interest in applying its law because Qualcomm is a California business and the Cartwright Act benefits consumers. The court also concluded, however, that Direct Only States have no interest in applying their laws because state laws that do not permit indirect purchasers to seek antitrust damages disadvantage resident consumers and are not intended to protect out-of-state businesses. Thus, the court determined, California's interest in applying its law outweighed other states' interests in having their law applied. As a result, the court concluded that it could apply California's Cartwright Act to the nationwide class, providing a sufficient basis to satisfy Rule 23(b)(3)'s predominance requirement.

9th Circuit Vacates District Court's Order

The 9th Circuit vacated the district court's order, holding that the district failed to properly apply California's three-step governmental test.

Under prong one, the panel agreed with the district court that material differences exist between the Cartwright Act (and the state antitrust laws of other Indirect Purchaser States), on the one hand, and the antitrust laws of Direct Only States, on the other. However, the panel also held that the district court improperly overlooked variations in the laws even among Indirect Purchaser States. The court noted that some Indirect Purchaser States permit indirect purchaser damages only in cases brought under consumer protection statutes, other states limit indirect purchaser claims to suits brought by the state attorney general, and yet other states permit only compensatory damages in actions brought by indirect purchasers. Thus, the district court failed to properly determine "the relevant law of each of the potentially affected jurisdictions," as prong one of California's three-part test requires. Mazza, 666 F.3d at 590.

Under prong two, while the panel agreed that California plainly has an interest in having its laws apply, it disagreed with the district court that Direct Only States have no interest in having their laws apply. Rather, the court held, Direct Only States "have an interest in how their markets are managed and how best to enforce antitrust violations and regulate commerce in their states." On this point, the court explained, antitrust laws differ from tort laws because antitrust laws are intended to protect competition rather than the individual parties to the lawsuit. In other words, "the relevant interests are not simply about the benefit or harm to resident consumers or liability to resident antitrust defendants; rather the relevant interests are about harm to the competitive process and in-state business activity." As such, Direct Only States have an interest in "'shielding out-of-state businesses from what the state may consider to be excessive litigation' through 'applying its law to transactions within its borders.'" (Quoting Mazza, 66 F.3d at 592-93.)

Under prong three, because the district found that only California had an interest in seeing its laws applied, it necessarily failed to properly determine which states' interests would be more impaired if their policies were subordinated to another state's law.

As a result, the court vacated the district court's certification order, and remanded the case for the district court to reconduct its choice-of-law analysis in light of the panel's opinion. However, even while it remanded the case for the district court to reconduct its analysis in the first instance, the panel left little doubt as to how it believes the issue should be decided: "Here, more than one state's law should apply to the 23(b)(3) class. [Citation] The [Direct Only States'] laws should control those purchases occurring in [Direct Only States] and class members with purchases in [Direct Only States] should be carved out of the 23(b)(3) class. Even among [Indirect Purchaser States], the various state laws are hardly uniform. Thus, it is not clear that a single class of all [Indirect Purchaser State] Plaintiffs could be certified under Rule 23(b)(3)."

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While the 9th Circuit did not explicitly hold in Stromberg v. Qualcomm that a nationwide class of indirect purchasers can never be certified as a Rule 23(b)(3) damages class under the antitrust laws, the court's analysis and reasoning may nevertheless ensure that result. In reasoning that Direct Only States always have an interest in having their antitrust laws apply to business activity within their state, even when it involves out-of-state businesses, it will be a tall task for future plaintiffs to certify a nationwide class -- or potentially even a multistate class -- of indirect purchasers seeking damages under the antitrust laws. 

The opinions expressed in this article are those of the author(s) and do not necessarily reflect the views of Skadden or its clients.