Antitrust Law Daily Wrap Up, ANTITRUST—N.D. Cal.: Paint recycler can pursue claims under California’s Cartwright Act, UCL, (Apr 12, 2017)

By Mark Engstrom, J.D.

A defunct paint recycler plausibly alleged an antitrust conspiracy against three companies that allegedly violated California’s Cartwright Act by excluding competition in the paint industry, the federal district court in San Francisco has ruled. The recycler’s factual allegations plausibly established an agreement among the defendants to exclude competition—and thus unreasonably restrain trade—by refusing to do business with the recycler. In addition, the allegations plausibly excluded the possibility of alternative explanations for the allegedly exclusionary conduct. Dismissal of the Cartwright Act claim was therefore unwarranted. Dismissal of a claim under the state’s Unfair Competition Law (UCL) was also unwarranted, but only to the extent that the claim was asserted under the unlawful and unfair prongs of the UCL; to the extent that the fraudulent prong was implicated, the pleadings failed to identify any misrepresentations by the defendants (GreenCycle Paint, Inc. v. PaintCare, Inc., April 11, 2017, James, M.).

Lawsuit. A latex paint processor (GreenCycle Paint) sued a stewardship organization in the paint and coatings industry (PaintCare Inc., a project of the American Coatings Association, a trade association) and two companies that transported post-consumer recyclable paint (Clean Harbors Environmental Services and Stericycle Environmental Solutions) for violations of California‘s antitrust and unfair competition laws. According to GreenCycle, the defendants conspired to exclude the paint processor from the recycled paint market.

GreenCycle complained that it could not acquire post-consumer paint for recycling because the defendants had secretly agreed to exclude GreenCycle from California’s Architectural Paint Recovery Program (the "Program") in an effort to reduce the amount of recycled paint in the San Francisco Bay Area. Compared to mid and high-grade paint, recycled paint was sold at a discount, GreenCycle alleged; therefore, the availability of recycled paint threatened the profits of PaintCare’s owners and members.

Significantly, post-consumer paint from the San Francisco Bay Area was shipped out of state, which increased the amount of payments to the transportation company defendants, reduced the competition for paint sales in the Bay Area, and maintained the sales and profits of the owners and members of defendant PaintCare, according to GreenCycle.

Cartwright Act. In the court’s view, Greencycle alleged sufficient facts to support its assertion that the defendants had acted in concert. GreenCycle alleged that PaintCare—the sole stewardship organization of the Architectural Paint Recovery Program—was created by the American Coatings Association (ACA), and also that, to prevent recycled paint from competing with more expensive "virgin" paint in the lucrative Bay Area market, the defendants agreed to ship post-consumer paint to distant recycling facilities, thus removing the threat of recycled paint in the Bay Area.

In addition, the defendants refused to do business with GreenCycle, allegedly in an effort to: (1) prevent the recycling of paint in the Bay Area (thereby allowing Stericycle and Clean Harbors to collect higher payments for more distant shipments) and (2) prevent additional recycled paint from entering the Bay Area market (thereby risking competition with the owners and members of PaintCares). Because GreenCycle had proffered plausible examples of coordinated activities that were conducted to prevent the plaintiff from entering the market and competing, the court decided that GreenCycle had sufficiently alleged that the defendants had made a conscious commitment to a common scheme that was designed to achieve an unlawful objective.

GreenCycle did not explicitly articulate a specific theory of antitrust liability (e.g., group boycott, refusal to deal, price-fixing, etc.), but it proffered sufficient factual allegations to plausibly establish an agreement by the defendants to shun the plaintiff’s business to exclude competition, the court explained. Moreover, the allegations excluded the defendants’ "innocent" explanation that GreenCycle was unqualified to accept recycled paint.

GreenCycle further alleged that, while the company was operating: (1) it was the only latex paint recycler in the San Francisco Bay Area and (2) other entities had successfully used it to recycle paint. Even after Stericycle had approved GreenCycle as a latex paint recycler, GreenCycle did not receive any used paint from Stericycle—or any other hauler in the PaintCare program—for eight months.

Previously, the court had decided that GreenCycle’s allegations of a conspiracy to suppress the recycling of latex paint "lack[ed] plausibility" because the allegations appeared to undermine the purpose of PaintCare’s stewardship mission. However, GreenCycle’s additional pleadings clarified PaintCare’s motivation: to allow its owners to sell virgin paint without having to compete with GreenCycle’s more affordable recycled paint. In the court’s view, that clarification made the alleged conspiracy "sufficiently plausible," a conclusion that was particularly true because GreenCycle had plausibly alleged that it had done everything that the defendants had asked it to do to qualify as a paint processor.

PaintCare argued that the "uncontested facts" showed that other recyclers had much more experience and a proven track record of success, but that argument was properly considered on a motion for summary judgment, not a motion to dismiss. For all of those reasons, the court concluded that GreenCycle had plausibly alleged an antitrust conspiracy.

UCL. GreenCycle alleged that its exclusion from the recycled latex paint market forced it to close its business due to an inability to acquire used paint. According to the court, that allegation was sufficient to allege a loss of money or property as a result of the defendants’ acts. Standing to sue was thus established under the UCL.

In addition, GreenCycle’s plausible allegations of a Cartwright Act violation were sufficient to allege a viable claim under the unlawful and unfair prongs of the UCL, and neither of those claims was barred by the safe harbor provision of the California Public Resources Code. Significantly, the plain language of the safe harbor showed that it was limited to actions that were taken to "increase" the recycling of architectural paint. In this case, however, the defendants had allegedly taken steps to decrease the recycling of paint.

Nevertheless, a viable claim under the "fraudulent" prong was not pleaded. According to the court, GreenCycle failed to identify any representations by the defendants; moreover, it failed to state when the representations were made or how they were likely to mislead the public. For those reasons, the court dismissed—without leave to amend—the fraudulent practices claim under the UCL.

The case is No. 15-cv-04059-MEJ.

Attorneys: Greggory C. Brandt (Wendel, Rosen, Black & Dean, LLP) for GreenCycle Paint, Inc. Thomas Edward Wallerstein (Venable LLP) and Eric Gordon Lasker (Hollingsworth LLP) for Paintcare, Inc. Katherine Anna Scott-Smith (Burnham Brown) for Clean Harbors Environmental Services, Inc. Raymond J. Etcheverry (Parsons, Behle & Latimer, PLC) and Matthew Schechter (McManis Faulkner) for Stericycle Environmental Solutions, Inc.

Companies: Paintcare, Inc.; Clean Harbors Environmental Services, Inc.; Stericycle Environmental Solutions, Inc.; GreenCycle Paint, Inc.

Cases: Antitrust StateUnfairTradePractices CaliforniaNews