Antitrust Law Daily Wrap Up, ANTITRUST—S.D. Tex.: Claims over Houston strip club settlement survive motion to dismiss, (Jul 15, 2015)

By Linda O’Brien, J.D., LL.M.

An adult entertainment club was allowed to amend its antitrust claims against the City of Houston in relation to a city settlement with other such clubs, even though the complaining club failed to prove that the city allowed the competing clubs to violate municipal ordinances as part of a conspiracy, according to a memorandum and recommendation by a magistrate judge in the federal district court in Houston (Houston KP, LLC. v. The City of Houston, July 14, 2015, Miller, G.).

In 1997, the City of Houston enacted an ordinance regulating many aspects of sexually-oriented business and their employees. The ordinance resulted in a number of lawsuits filed by adult entertainment clubs. In 2013, the City entered into a settlement with 16 clubs, whereby the City agreed not to prosecute the clubs for municipal ordinance violations on the condition that the clubs donate funds to the Human Trafficking Abatement Fund and adopt certain policies.

Houston KP, LLC, which operates an adult entertainment club, requested to join in the settlement but that request was denied by the City. Subsequently, in October 2014, Houston KP filed suit against the City, alleging, in part, that the City conspired with a number of Houston KP’s competitors in violation of Section 1 of the Sherman Act. Specifically, the plaintiff asserted that, because of the settlement, its competitors were permitted to operate as sexually-oriented businesses without obtaining the required permit. Before the court was the City’s motion to dismiss.

Antitrust claims. The City contended that the plaintiff failed to allege that the City engaged in a conspiracy that substantially affected a relevant market. The court agreed and found that the plaintiff’s current pleadings failed to plausibly allege either (1) the City or the competing clubs engaged in a conspiracy to restrict trade or (2) such a conspiracy had the effect of restraining trade in a relevant market. There was no dispute that the City and the clubs reached a settlement, but there was no language in the agreement that bore directly on the restraint of the plaintiff’s trade.

Furthermore, the plaintiff failed to characterize the agreement in antitrust terms by alleging that the City had a number of vertical agreements with the clubs whereby, in exchange for money, the clubs were permitted to offer services that violated the City’s ordinance. According to the court, to state a claim involving vertical restraints of trade, a plaintiff must plausibly define the relevant market. In this case, the plaintiff did not define a relevant geographic market; instead it made only general statements about the importance of the City of Houston to international trade and interstate commerce.

However, instead of dismissing the complaint, the plaintiff was allowed leave to file an amended complaint to address the noted deficiencies.

The case is No. H-14-2928.

Attorneys: Jeremy Jason Gaston (Hawash Meade & Gaston LLP) for Houston KP, LLC. James M. Corbett, The City of Houston Legal Department, for The City Of Houston.

Companies: Houston KP, LLC

Cases: Antitrust TexasNews