Articles Posted in Pleading standards

 

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Author: Luis Blanquez

Following DOJ’s remarks on blockchain, it was only a matter of time until antitrust law and the unstoppable blockchain world would meet in court. And it finally happened some months ago in the complex Bitmain case.

In this case a cryptocurrency developer and mining company sued Bitcoin Cash miners, developers, and exchange operators for violating of Section 1 of the Sherman Act and Section 4 of the Clayton Act. It accused them of manipulating a network upgrade to take control of the Bitcoin Cash blockchain. The Court dismissed the Amended Complaint twice (the last one with prejudice), for failing to plausibly show a conspiracy to hijack the network and centralize the market, an unreasonable restriction of trade, and antitrust injury.

  1. Blockchain and cryptocurrencies

Blockchain is such a complicated technology that just the simple task of defining it would require a much longer article. But the Southern District Court of Florida did a great job explaining in very simple terms what these two concepts––blockchain and cryptocurrencies–– are:

Cryptocurrency is a form of digital currency that trades in currency markets. The Satoshi Nakamoto whitepaper, published in October 2008, launched the idea of this “peer-to-peer” version of electronic cash that allows online payments from one party to another, independent of any financial institution. The Whitepaper coined the term “Bitcoin”, and today Bitcoin and Bitcoin Cash are different forms of cryptocurrency.

Cryptocurrencies are a “permissionless” system that rely on a network of decentralized encrypted public ledgers that document all digital transactions, known as a “blockchain”. The blockchain is a series of blocks, which are units of accounting that record new transactions in cryptocurrency. Confidence and trust in the accuracy of the transactions in the blockchain is possible because the decentralized ledgers are identical and continuously updated and compared.

The system has mechanisms that allow for consensus on the validity of the blockchain. One is “Proof-of-Work”, which is designed to eliminate the insertion of fraudulent transactions in the blockchain. Also, the “main chain” (normally, the longest chain) at any given time, is whichever valid chain of blocks has the most cumulative “Proofs-of-Work” associated with it. A consensus being reached on the longest blockchain is essential to the integrity of the network.

New cryptocurrency is created through a process called “mining”. Miners compete to “mine” virtual currencies by using computing power that solves complex math puzzles. The computer servers that first solve the puzzles are rewarded with new cryptocurrency, and the solutions to those puzzles are used to encrypt and secure the currency. The awarded currency is then stored in a digital wallet associated with the computing device that solved the puzzle.

  1. The Bitmain case

In a nutshell, this case is about how certain mining pools, protocol developers and crypto-exchange defendants allegedly colluded to manipulate a network upgrade by creating a new hard fork, taking control of the Bitcoin Cash cryptocurrency. In the end, however, the court concluded that the plaintiff ––a protocol developer of blockchain transactions and mining cryptocurrencies––, failed to (i) show a plausible conspiracy, (ii) define any relevant product market to prove an unreasonable restriction of trade, and (iii) show any antitrust injury.

The Parties

As Konstantinos Stylianou effectively explains in his article What can the first blockchain antitrust case teach us about the crypto economy?, in the cryptocurrency world it is important to understand what the different players are and how they are connected in the market: investors, mining pools (groups of miners that combine their mining resources), crypto-exchanges, and protocol developers. We highly recommend his article.

The plaintiff, United American Corporation (UAC), is a developer of technologies for both the execution of blockchain transactions and mining cryptocurrencies. One of them is called BlockNum, a distributed and decentralized ledger technology that allows the execution of blockchain transactions between any two telephone numbers regardless of their location, eliminating the need for cryptocurrency wallets. The other one is called BlockchainDome, which provides a low-cost energy-efficient solution for mining cryptocurrency. UAC built four domes in total that operate over 5,000 Bitcoin Cash-based miners, investing more than $4 million in technology.

On the flip side, there are three different categories of defendants:

  • The mining pools: (i) Bitmain Technologies operate two of the largest Bitcoin Core and Bitcoin Cash mining pools in the world: Antpool and BTC.com. It is also the largest designer of Application Specific Integrated Circuits (“ASIC”), which are chips that power the Antminer series of mining servers––the dominant servers mining on a number of cryptocurrency networks, including Bitcoin and Bitcoin derivatives; (ii) Wu, CEO of Bitmain Technologies and one of its founders; and (iii) Ver, founder of Bitcoin.com, which provides Bitcoin and Bitcoin Cash services.
  • The crypto exchanges––Kraken and its CEO Jesse Powell––which operate exchanges on which Bitcoin, Bitcoin Cash and other cryptocurrencies are traded.
  • The protocol developers Shammah Chancellor, Amaury Sechet and Jason Cox who––similarly to UAC––, work on the development of the software to execute blockchain transactions and mining of cryptocurrencies.

The Alleged Antitrust Conspiracy

Summarized from the briefing:

Bitcoin Cash (or “BCH”) emerged as a cryptocurrency from the original Bitcoin Core (or “BTC”) on August 1, 2017, as a result of a “hard fork”. A hard fork is a change to the protocol of a blockchain network whereby nodes that mine the newest version of the blockchain follow a new set of rules, while nodes that mine the older version continue to follow the previous rules. Because the two rule-sets are incompatible, two different blockchains are formed, with the new version branching off.

The 2017 hard fork resulted from a dispute over Bitcoin’s utility: whether it should primarily be used to store value or conduct transactions.

(Note: BTC’s resistance to this significant attempt to fork it further strengthened it by demonstrating that it can overcome an attack of this type. If BTC were subject to significant forks that change its nature, it would not have the trust it has now as a store of value. This and other attacks on BTC actually strengthen it—Bitcoin is Antifragile in this way).

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Author: Luis Blanquez

As a long-standing antitrust attorney in Europe, making the decision to move from Madrid to San Diego a few years ago to practice law in the U.S. has been a life-changing experience. Both personally and professionally. Learning from other cultures, colleagues, and languages is something I strongly recommend to everyone. It opens your mind and provides you with a different perspective about the world and yourself. And of course, that also applies to the practice of law.

Indeed, when you move to a new jurisdiction you basically become a “newborn” attorney, but with all your past experience in the backpack. That puts you in the best position to approach everything with a “fresh pair of eyes”, which in turn allows you to add value to your team and cases in a unique way.

In that respect, something I noticed during these first years of practicing antitrust law in the U.S. is how district courts, in deciding motions to dismiss cases, disagree on the applicable standard when analyzing antitrust conspiracies. Some apply the summary-judgment or trial-like standard to conspiracy allegations, particularly when confronted with “non-parallel-conduct” cases, despite the fact that a complaint at that stage is constructed without the benefits of discovery. Others misunderstand the language in Twombly about “ruling out the possibility of independent action,”—which is specific to conscious parallelism cases—and they incorrectly add it to the list of pleading requirements.

What is the Biggest Mistake that District Courts Make in Antitrust Cases?

The Antitrust Pleading Standard Is Shifting Back Toward the Plaintiff

TWOMBLY AND THE PLAUSIBILITY STANDARD

For those not familiar with antitrust law, Bell Atlantic Corp. v. Twombly changed the antitrust pleading standards in federal court from one of “extreme permissibility” to the current “plausibility” standard. And that was a big deal because it basically re-defined what Federal Rule of Civil Procedure 8(a)(2) requires for a complaint to survive a motion to dismiss for failure to state a claim upon which relief can be granted under Rule 12(b)(6) FRCP.

In antitrust cases, a claim under Section 1 of the Sherman Act requires (i) a contract, combination, or conspiracy; (ii) an unreasonable restraint of trade in the relevant market; (iii) and antitrust injury.

For the first prong, there are two ways to prove a “contract, combination, or conspiracy”: (i) by direct evidence that shows the existence of an agreement; or (ii) through a combination of parallel conduct and “plus factors,” i.e., “economic actions and outcomes that are largely inconsistent with unilateral conduct but largely consistent with explicitly coordinated action.” In re Musical Instruments & Equip. Antitrust Litig., 798 F.3d 1186, 1194 (9th Cir. 2015).

Second, an unreasonable restraint of trade always involves some sort of antitrust illegal conduct such as fixing prices, allocating customers, a group boycott, or rigging bids, among many others.

Last, in order to survive a motion to dismiss, a complaint also requires antitrust injury. An antitrust plaintiff must show both constitutional standing and antitrust standing. If you want to know more about antitrust injury, we have written extensively on the subject.

The Elements of Antitrust Injury: A Two-Prong Test

Antitrust Injury and the Classic Antitrust Case of Brunswick Corp v. Pueblo Bowl-O-Mat

Here I will just focus on the two ways courts may prove a “contract, combination, or conspiracy”: (i) direct evidence, (ii) or circumstantial evidence and “plus factors”. This is the prong where district courts have been struggling when ruling on their motions to dismiss, mainly because Justice Souter’s opinion in Twombly included some language from the landmark summary-judgment decision (Matsushita) that the Court used to explain why in conscious parallelism cases, plaintiffs’ “offer of conspiracy evidence must tend to rule out the possibility that the defendants were acting independently.”

DIRECT EVIDENCE

Direct evidence in a Section 1 antitrust conspiracy means evidence that is explicit and requires no inferences to establish the conclusion that an agreement exists. In plain English, a “smoking gun” in the form of documents, meetings or defendants’ testimony.

Federal courts around the country have agreed––with very limited exceptions––that whenever a complaint includes such non-conclusory allegations of direct evidence of an agreement, there is no need to go any further on the question of whether such an agreement has been adequately pled. And this is important because it means that allegations of direct evidence of an agreement––if sufficiently detailed––are independently adequate and sufficient alone.

Bottom line, in direct evidence scenarios, there is no need to even carry out the Twombly “plausibility” analysis in the first place. To meet the direct evidence standard the evidence must explicitly support the asserted proposition without requiring any inference. In re Citric Acid Litig., 191 F.3d 1090, 1093 (9th Cir. 1999) (“Citric Acid”)

This is the only threshold that a plaintiff should meet in order to survive a 12(b)(6) motion to dismiss when providing direct evidence.

CIRCUMSTANTIAL EVIDENCE, PARALLEL CONDUCT AND “PLUS FACTORS”

But like everything meaningful in life, things are rarely that straightforward in antitrust law. Thus, in alleging a conspiracy, a plaintiff may present either direct evidence (or if that’s not possible), circumstantial evidence of defendants’ conscious commitment to a common scheme designed to achieve an unlawful objective. This is a mouthful, so let’s try to bring some light to it.

District courts have the power to insist on some degree of specificity in pleading before allowing an antitrust complaint relying on allegations of circumstantial evidence of agreement to proceed. That’s why the Supreme Court in Twombly offered some guidance as to how to properly plead an agreement in parallel conduct cases:

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Author: Jarod Bona

In 2007, the Supreme Court issued a bombshell of a case called Bell Atlantic v. Twombly, which caused both antitrust lawyers and civil procedure law professors to rethink how they go about their work.

For those of you not obsessed with law or antitrust, Twombly changed the antitrust pleading standards in federal court from one of extreme permissibility to the current “plausibility” standard.

Courts quickly began applying Twombly beyond antitrust cases, and it now is THE case for motions to dismiss that argue that plaintiffs have not plead enough to move to the next stage of litigation.

When the Supreme Court decided Twombly, it created a surge of excitement, and federal courts began dismissing cases left and right because plaintiffs had not alleged sufficient facts to show a “plausible” claim to relief, under antitrust or other laws.

Since then, I don’t think I have seen any antitrust complaint that wasn’t followed by a motion to dismiss, usually citing Twombly. Notably, courts coupled this elevated standard with refusals to start discovery until after plaintiffs leaped the motion-to-dismiss hurdle.

I believe, however, that the antitrust-pleading-standard pendulum is beginning to shift back toward the plaintiff.

Update: On November 10, 2014, the United States Supreme Court in Johnson v. City of Shelby issued a new plaintiff-friendly pleading decision.

Update 2: You can read my new article on antitrust pleading standards here: “What is the Biggest Mistake that District Court Judges Make in Antitrust Cases?”

Update 3: Read this article from Luis Blanquez: What is the Twombly Motion to Dismiss Standard for Antitrust Cases? Comparing the Ninth and Second Circuits.

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Antitrust Pleading StandardsI won’t hide the ball; I’ll just tell you the answer: Federal district courts deciding motions to dismiss an antitrust case too often apply the summary-judgment standard to conspiracy allegations, particularly when confronted with non-parallel-conduct cases.

This isn’t scientific or empirical—it is my observation and is enough of an issue that more than one federal appellate court has complained about it over the last few years.

The motion to dismiss standard for antitrust conspiracies is, to be fair, somewhat confusing thanks to a case called Bell Atlantic v. Twombly. You can read my prior article about Twombly and pleading standards here.

Before the US Supreme Court decided Twombly in 2007, courts applied a very deferential standard to antitrust motions to dismiss, including conspiracy allegations.

Courts used to follow an old Supreme Court case called Conley v. Gibson (1957) (which you will find cited in many, maybe even most, motion-to-dismiss decisions preceding Twombly). Under Conley, a complaint satisfied specificity requirements if it stated facts that made it “conceivable” that plaintiff could prove its legal claims. A court could only dismiss a claim if it appeared that a plaintiff could prove—the famous phrase—“no set of facts” in support of his or her claim that would entitle the plaintiff to relief.

The Twombly Decision

I remember when I read the Supreme Court’s Twombly decision for the first time. Justice Souter wrote the majority opinion. At the time, I was with DLA Piper and represented a defendant in the In re Insurance Brokerage Antitrust Litigation (Here is an article about the litigation from Bill Kolasky, who was one of the joint defense group leaders). The case was still with the trial court during one of the motion-to-dismiss briefing rounds. (Usually when a court dismisses an antitrust complaint for the first time, it will do so without prejudice and with leave to amend, which leads to another round of motion-to-dismiss briefing).

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Antitrust lawsuit costsIf you ask this question to an antitrust lawyer, you will receive some form of “it depends” in response. That’s true. It does depend. And you will inevitably follow up with, “What does it depend upon?” Let’s see if we can begin to answer that question.

What we are discussing here is not a class-action antitrust lawsuit, but an antitrust claim by one business or individual against another. Class-action antitrust cases usually incorporate some contingency-fee approach and are lawyer-centered rather than client-centered cases. That is, the plaintiff law firms act as “private-attorney generals” to enforce the antitrust laws through the class-action vehicle. Those cases are very different than the typical case brought by a company against its competitor, supplier, or customer. You can read our article on defending against class certification in antitrust cases here.

Antitrust cases are expensive. Usually. But if managed effectively, they don’t need to cost nearly as much as they did when big law firms held a virtually monopoly on the cases by convincing clients that only they had the requisite resources to file such a massive claim.

With the combination of technological advancements and third-party providers, I believe that, in many instances, hiring a big law firm to run your antitrust case is a costly mistake. We’ll get into that more below.

I am not going to get into actual numbers here because fees and other costs vary and will change over time. But if you are considering antitrust litigation, studying the components of an antitrust lawsuit will help you (1) understand what you are paying for and (2) figure out how to reduce your costs.

Below are the primary-cost drivers of an antitrust case. Of course, every case is different and a lot can come up in litigation that is unexpected and unusual. That keeps it interesting, but also increases cost variances. The list below doesn’t hit everything, but I hope it helps you.

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