Antitrust Law Daily Wrap Up, TOP STORY—CDCal: Conspiracy to Monopolize Markets Connected with Tattoo Industry Adequately Alleged, (Apr 18, 2013)

By Peter Reap, J.D., LL.M.

The American Institute of Intradermal Cosmetics, Inc. ("AIIC"), adequately alleged that its competitor, the Society of Permanent Cosmetic Professionals ("SPCP"), and its members (collectively, the "Defendants"), violated Section 1 of the Sherman Act by conspiring with each other to drive business from AIIC and to monopolize relevant markets connected with the tattoo industry, the federal district court in Los Angeles has decided (American Institute of Intradermal Cosmetics, Inc. v. Society of Permanent Cosmetic Professionals, April 16, 2013, Feess, G.).

However, the AIIC failed to state a claim under Section 2 of the Sherman Act against the Defendants and that claim was dismissed with leave to amend. In addition, the AIIC’s claims against three individual defendants were dismissed because they were not subject to personal jurisdiction in California.

Background. AIIC is a competitor in the permanent cosmetic industry, a specialized form of cosmetic tattooing with colored pigments. It manufactures and sells pigment dispersions and supplies, provides training and certification for permanent cosmetic technicians, performs permanent cosmetic procedures, and hosts events related to permanent cosmetics. The SPCP is a non-profit professional association of cosmetic professionals that has grown to over 1400 members. The remaining Defendants are a number of permanent cosmetic manufacturers, distributors, and technicians who are SPCP members.

AIIC alleges that Defendants have conspired with each other to drive business away from AIIC and other competitors in violation of section 1 of the Sherman Act, and have attempted to monopolize certain markets within the permanent cosmetic industry in violation of section 2 of the Sherman Act. Essentially, it claims that SPCP created a set of "industry standards" or "guidelines" as well as a "Code of Ethics," which, "as a pretext, ostensibly help maintain high quality and safety standards for the industry."

AIIC contends that "[t]his pretext, however, is false and deceptive," and that "Defendant SPCP’s real purpose in enforcing these guidelines, standards, and ethics code is to stifle competition and protect itself and its approved suppliers and trainers from other competitors."

Section 1 of the Sherman Act. Section 1 of the Sherman Act prohibits every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States. To prevail on a section 1 claim, a plaintiff must prove: (1) that there was a contract, combination, or conspiracy; (2) that unreasonably restrained competition; and (3) that affected interstate or foreign commerce.

The Defendants take issue with AIIC’s reliance on Radiant Burners Inc. v. Peoples Gas Light & Coke Co., 364 U.S. 656 (1961), for its argument that Defendants committed a per se violation of section 1 by agreeing "‘to eliminate or significantly reduce sales of goods and services to SPCP members from suppliers and trainers that are not approved by Defendant SPCP.’"

In Radiant Burners, the American Gas Association, Inc. ("AGA"), "a membership corporation," adopted a "‘seal of approval’ which [wa]s affixe[d] on such gas burners as it determine[d] ha[d] passed its tests." 364 U.S. at 658 (1961). The complaint in that case alleged that the "tests [we]re not based on ‘objective standards,’ but [we]re influenced by respondents, some of whom [we]re in competition with petitioner, and thus its determinations c[ould] be made ‘arbitrarily and capriciously.’" Id.

However, here, just as in Radiant Burners, AIIC alleges that the "‘guidelines,’ standards, and [] code of ethics" promulgated by SPCP, which "ostensibly help maintain high quality and safety standards for the industry," have the "real purpose" of "stifl[ing] competition and protect[ing] itself and its approved suppliers and trainers from other competitors," the court observed. Just as the AGA’s standards effectively precluded the sale of gas to the Radiant Burners plaintiff, the SPCP’s "guidelines and rules have been enforced arbitrarily, capriciously, and in such a way that forecloses Plaintiff and other pigment manufacturers, distributors, and trainers from selling their products and services to SPCP’s technician members."

In support of these contentions, AIIC points out that, despite the fact that no intradermal pigments used for permanent make-up tattoos are approved by the FDA, SPCP’s "Guidelines for Pigment Manufacturers" include the statement: "It is recommended by the SPCP that inorganic or organic colorants should come from the FDA[’s] FD&C and D&C listings 21-CFR-73 ad 74." AIIC also alleges that SPCP’s "Code of Ethics" contains similar references to FDA approval that are not, in fact, based on any FDA guidelines, the court noted.

Furthermore, AIIC alleges that the SPCP selectively enforces its guidelines. For example, although Defendants campaigned heavily against shorter technician training programs, such as those offered by AIIC, in reality many SPCP-approved trainers do not abide by the SPCP guidelines.

The above represented only a sampling of the allegations in AIIC’s Complaint, which spans more than forty pages. This sampling alone demonstrated that, just as in Radiant Burners, Defendants allegedly have abused an industry-wide standard-setting process for the purpose of stifling competition. Accordingly, AIIC has adequately alleged a per se violation of section 1 of the Sherman Act.

Antitrust injury. Even in cases involving per se violations of the Sherman Act, the right of action under section 4 of the Clayton Act is available only to those private plaintiffs who have suffered antitrust injury. The Ninth Circuit has enunciated a four-part definition of antitrust injury: (1) unlawful conduct; (2) causing an injury to the plaintiff; (3) that flows from that which makes the conduct unlawful; and (4) that is of the type the antitrust laws were intended to prevent.

Contrary to the Defendants’ contention, AIIC did not concede in its Complaint that competition had increased, but instead attempted to demonstrate the injury suffered by AIIC and its competitors as a result of allegedly subjective guidelines promulgated and enforced by Defendants to aid them in stifling competition, the court determined. In addition to alleging injury to itself, AIIC alleged injury to other competitors and consumers of its products (many of whom are technicians) throughout the Complaint.

Thus, AIIC adequately alleged an adverse effect upon competition.

Section 2 of the Sherman Act. To establish a Sherman Act section 2 violation for attempted monopolization, a private plaintiff seeking damages must demonstrate four elements: (1) specific intent to control prices or destroy competition; (2) predatory or anticompetitive conduct directed at accomplishing that purpose; (3) a dangerous probability of ‘achieving monopoly power;’ and (4) causal antitrust injury.

AIIC’s section 2 claim failed because, to pose a threat of monopolization, one firm alone must have the power to control market output and exclude competition, the court ruled. As pointed out by the Defendants, AIIC "has not alleged that a given Defendant (not all of them collectively) has a dangerous probability of achieving monopoly power."

The case is No. CV 12-06887 GAF (JCGx).

Attorneys: Bradley C Weber (Locke Lord LLP) for Amercan Institute of Intradermal Cosmetics, Inc. Timothy K Branson (Gordon and Rees LLP) for Society of Permanent Cosmetic Professionals.

Companies: American Institute of Intradermal Cosmetics, Inc.; Society of Permanent Cosmetic Professionals

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