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Class Action Defense Cases–Blough v. Holland Realty: Ninth Circuit Affirms Summary Judgment Of Antitrust Class Action Claims Because There Was No Adverse Effect On Competition In The Tied Product Market

District Court did not Err in Granting Summary Judgment on Class Actions’ Claims Alleging Antitrust Violations in the Form of Unlawful Tying Arrangements in the Sale of Undeveloped Properties because Challenged Conduct did not Adversely Affect Competition in the Market Ninth Circuit Holds

Plaintiffs filed four separate putative class actions against several defendants alleging “that various realtors representing developers tied the sale of undeveloped lots to services and commissions for developed property in violation of the federal and state anti-trust laws.” Blough v. Holland Realty, Inc., 574 F.3d 1084, 1087 (9th Cir. 2009). According to the class action complaints, “Buyers entered into agreements with homebuilders to purchase developed lots (an undeveloped lot with a newly-constructed home) in different subdivisions in the Boise, Idaho area. Realtors represented the developers of the subdivisions in allocating lots to the homebuilders. The price of the developed lot that Buyers paid to the homebuilders included a commission (or referral fee) for Realtors, typically calculated as a percentage of the total price of the developed lot. It is apparently the custom in Idaho for the seller, rather than the buyer, to pay the commission owed to the listing agent and to the selling agent (the agent assisting the buyer’s search for a property) when a transaction closes. Buyers claim the Realtors engaged in a per se unlawful tying arrangement when they tied the sale of undeveloped lots (the tying product) to their services and commissions on the sale of developed lots (the tied product).” Id., at 1088. Plaintiffs’ lawyer moved the district court to certify the litigation as a class action: the district court granted class action treatment for purposes of class-wide adjudication of the tying claim. Id. The district court “identified the tying product as sales of undeveloped lots and the tied product as Realtors’ services, i.e., commissions, with regard to sale of developed lots.” Id. As the Circuit Court explained, “The class consists of those who: (1) bought undeveloped lots in subdivisions where Realtors had the exclusive right to market lots on behalf of the developer; (2) were required to build a house on the lot in order to buy the lot; and (3) were required to pay Realtors a commission based on the cost of the lot plus the actual or estimated cost of the house in order to buy the lot.” Id. Defense attorneys for the realtors moved for summary judgment, and plaintiffs sought additional discovery “into other members of the class to determine whether any of them wanted to buy the services of a listing agent from someone other than Realtors.” Id. The district court denied plaintiff’s request for further discovery “on the ground that they had shown no plausible reason to believe that other members of the class (unlike themselves) would want to purchase the tied product from anyone else,” and granted defendants’ motion for summary judgment “concluding that Buyers failed to show that the alleged tying practice ‘affects a not insubstantial volume of commerce in the tied product market.’” Id. (citation omitted). The Circuit Court explained at pages 1086-87, “Applying the doctrine of ‘zero foreclosure,’ the district court granted summary judgment to the realtors because there is no market for listing and referral services among potential buyers of newly-constructed houses, thus no competition in the tied market to be harmed.” Plaintiffs appealed, and the Ninth Circuit affirmed.

The Ninth Circuit considered all four cases in a single opinion because “they present the same legal issue and are factually indistinguishable.” Blough, at 1088. The issue before the Court was whether the facts presented by these class actions fell within those certain circumstances under which § 1 of the Sherman Act could be “violated by tying two products or services together, whereby ‘the seller conditions the sale of one product (the tying product) on the buyer’s purchase of a second product (the tied product).’” Id. (citation omitted). Under Ninth Circuit case law, “Tying arrangements are forbidden on the theory that, if the seller has market power over the tying product, the seller can leverage this market power through tying arrangements to exclude other sellers of the tied product.” Id. (citation omitted). However, plaintiffs must demonstrate (1) that defendants “tied together the sale of two distinct products or services,” that defendant possess “[sufficient] economic power in the tying product market to coerce its customers into purchasing the tied product,” and (3) “that the tying arrangement affects a ‘not insubstantial volume of commerce’ in the tied product market.” Id., at 1088-89 (citation omitted). As noted above, it is this third condition that dictated the outcome of this case. The question for the district court, and on appeal, was “whether a total amount of business, substantial enough in terms of dollar-volume so as not to be merely de minimis, is foreclosed to competitors by the tie.” Id., at 1089 (citations omitted).

The Ninth Circuit concluded, “Here, there is no evidence that any purchaser was affected or that any competition was foreclosed. In these circumstances there is zero foreclosure and the third prong is not satisfied.” Blough, at 1089. More specifically, “Zero foreclosure exists where the tied product is completely unwanted by the buyer.” Id. (citations omitted). As the Circuit Court explained, “In such a case, there is no unlawful tying arrangement because there is no adverse effect on competition in the tied product market.” Id. The “zero foreclosure” rule governed because plaintiffs “had no desire to purchase the tied product,” id., at 1090. “Without a market for the tied product, there can be no per se unlawful tying arrangement because there is ‘zero foreclosure’ of competition. Given zero foreclosure, it follows that Buyers failed to show harm to a ‘not insubstantial volume of commerce’ in the tied product market. As this is required to prevail on a per se tying claim, summary judgment was properly granted.” Id. Accordingly, the district court did not err in granting summary judgment on the class action tying claims, id., at 1091-92.

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