IP Law Daily, TRADE SECRETS—E.D. Cal.: Court dismisses Sherman Act counterclaim alleging sham trade secrets lawsuit, (Sep 28, 2022)

By Patricia K. Ruiz, J.D.

The counterclaim alleged the purpose of the sham lawsuit was to misuse the courts as a vehicle for carrying out an anticompetitive scheme.

A counterclaim brought by defendant Milk Moovement for sham litigation under the Sherman Act against plaintiff Dairy, LLC, a company that provides producer payroll software to milk processors and dairy cooperatives was dismissed because Milk Moovement’s allegations were insufficient under the Ninth Circuit’s heightened pleading standard to bring its counterclaim within the sham litigation exception to Noerr-Pennington protection. In a counterclaim, recasting disputed issues as misrepresentations by the other party does not meet the heightened pleading standard required by the Ninth Circuit when a claim involves the right to petition a government body, held the U.S. District Court for the Eastern District of California. The court granted a motion to dismiss the counterclaim under the Sherman Act without leave to amend (Dairy, LLC v. Milk Moovement, Inc., September 22, 2022, Shubb, W.).

Background. Dairy, LLC, filed suit against Milk Moovement, Inc., and Milk Moovement, LLC, (Milk Moovement, collectively) alleging trade secret misappropriation under federal and California law, as well as intentional interference with contractual relations. In counterclaims, Milk Moovement sought declaratory judgment of no protectable trade secret under both the Defend Trade Secrets Act (DTSA) and the California Uniform Trade Secrets Act (CUTSA), declaratory judgment of no misappropriation under both the DTSA and the CUTSA and claimed sham litigation in litigation in violation of the Sherman Act. Dairy moved to dismiss the Sherman Act counterclaim, arguing Milk Moovement failed to amend its counterclaim consistent with a previous order by the court and, instead, relied on allegations similar to those the court already rejected.

Noerr-Pennington doctrine. The antitrust counterclaim alleged that the purpose of Dairy’s allegedly sham lawsuit is to misuse the courts as a vehicle for carrying out its anticompetitive scheme, including imposing substantial litigation costs on Milk Moovement and spreading unwarranted fear in the marketplace about Milk Moovement to dissuade customers. Under the Noerr-Pennington doctrine, an entity is immune from antitrust liability based on the entity’s litigation-related conduct unless the conduct falls within the “sham” exception to the doctrine. To fall under the sham exception, the lawsuit must be objectively baseless in the sense that no reasonable litigant could realistically expect success on the merits. The courts may examine the litigant’s subjective motivation only if the lawsuit is objectively baseless; at that point, the court may focus on whether the lawsuit conceals an attempt to interfere directly with the business relationships of a competitor through the use of the governmental process, rather than the outcome of the process.

Sham litigation allegations. Previously, Milk Moovement alleged that Dairy has a history of acquiring similar companies; it unsuccessfully attempted to acquire Milk Moovement; and when Dairy lost California Dairies, Inc., to Milk Moovement, it initiated a frivolous lawsuit. The court found the sham litigation allegations were insufficient, as the allegations about the meritless claims were substantially similar to the previously rejected claims made when Milk Moovement moved to dismiss Dairy’s claims. The court further found that the allegations by Milk Moovement were conclusory and did not sufficiently allege Dairy’s lawsuit was objectiveless baseless.

The court found objectively baseless Milk Moovement’s additional allegations that that Dairy timed the lawsuit to be most disruptive to Milk Moovement’s business, rather than to protect allegedly vulnerable trade secrets; Dairy knew California Dairies shared the reports with Milk Moovement for more than a month before filing the lawsuit, suggesting Dairy knew there was no basis for the trade secrets claim and only brought suit to advance its monopoly; and the court’s prior orders denying motions by Dairy for a temporary restraining order (TRO) and preliminary injunction supports finding that Dairy’s lawsuit is a sham. The court cited the Supreme Court’s findings that anticompetitive intent cannot affect the objective prong of Noerr’s sham exception and that genuine petitioning activities are not illegal, either standing alone or as part of a broader scheme itself violative of the Sherman Act.

Milk Moovement’s argument that the court’s previous orders denying Dairy’s motions for a TRO and a preliminary injunction supported their counterclaim that Dairy’s lawsuit is a sham is fallacious, the court held, as the standard applied to those motions (requiring a showing of a likelihood of success on the merits) differs from the standard currently being applied. The court found that Dairy sufficiently pleaded that it could “realistically expect to secure favorable relief,” which precludes a finding that an antitrust defendant has engaged in sham litigation because an objectively reasonable effort to litigate cannot be sham regardless of intent.

Finally, the court held that Milk Moovement failed to meet the heightened pleading standard applied by the Ninth Circuit “where a claim involves the right to petition governmental bodies under Noerr-Pennington,” which is necessary to avoid a chilling effect on the exercise of the First Amendment right to petition. The heightened pleading standard would have no force if, in order to satisfy it, a party could simply recast the disputed issues from the underlying litigation as misrepresentations by the other party. Milk Moovement’s allegations that Dairy initiated a frivolous lawsuit to eliminate Milk Moovement’s competitive threat simply recast Dairy’s allegations as wrong and did not meet the heightened pleading standard, the court held.

The Case is No. 2:21-cv-02233-WBS-AC.

Attorneys: Christian Ellis, Phv (Bonds Ellis Eppich Schafer Jones LLP) for Dairy, LLC. Benjamin Kaplan Hand (Morgan, Lewis & Bockius LLP) for Milk Moovement, Inc. Carla B. Oakley (Morgan Lewis & Bockius, LLP) for Milk Moovement, LLC.

Companies: Dairy, LLC; Milk Moovement, Inc.; Milk Moovement, LLC

Cases: TradeSecrets CaliforniaNews