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Ninth Circuit Clarifies Analysis of Alleged Hub-and-Spoke Conspiracies Under the Sherman Act

Yesterday, the Ninth Circuit issued an opinion affirming the dismissal of plaintiffs’ consolidated complaint in In re Musical Instruments and Equipment Antitrust Litigation. In addressing plaintiffs’ allegations of a hub-and-spoke conspiracy, the Ninth Circuit reiterated that each component of such a conspiracy (both vertical and horizontal) must be evaluated separately. After performing this analysis, the court agreed that plaintiffs had failed to plead sufficient facts necessary to establish the likelihood of any horizontal conspiracy (as opposed to parallel industry conduct), and dismissed the case.

The plaintiffs had filed a purported class action on behalf of consumers who had purchased guitars and guitar amplifiers from Guitar Center, Inc., alleged to be the largest retail seller of musical instruments in the country, and the largest customer of musical instrument manufacturers. The plaintiffs claimed that Guitar Center, acting in conjunction with the National Association of Music Merchants (“NAMM”) trade association, had pressured five manufacturer defendants to adopt policies fixing the minimum prices at which any retailer could advertise their products. The plaintiffs further alleged that as part of this conspiracy the manufacturer defendants had agreed among themselves to adopt similar policies—creating a “hub-and-spoke” conspiracy with Guitar Center as the hub, the manufacturers as the rim, and the trade association acting as an intermediary between the parties (which the Ninth Circuit described, tongue-in-cheek, as the “lug nuts.”)

In reviewing the plaintiffs’ claims, the Ninth Circuit noted that it had never previously addressed how to analyze a hub-and-spoke conspiracy. The Ninth Circuit noted, however, that a hub-and-spoke conspiracy is “simply a collection of vertical and horizontal agreements,” and that such a conspiracy should be “broken into its constituent parts,” which can each be analyzed using the rule of reason (for vertical agreements) or under a per se analysis (for horizontal agreements). Noting that plaintiffs had not elected to argue that the vertical elements of the conspiracy (i.e., the agreements between Guitar Center and each manufacturer) violated the Sherman Act, the court found that their claims were instead “predicated on the existence of the horizontal agreements among the manufacturers.” In reviewing the plaintiff’s allegations related to the horizontal conspiracy, which depended on the existence of a number of “plus factors” that can suggest agreement, the Ninth Circuit found that each factor was equally compatible with parallel action, and thus failed to state a claim under Bell Atlantic Corp v. Twombly. (Judge Peterson, writing in dissent, found that the plus factors pleaded by the plaintiffs, taken together, should be sufficient to survive a motion to dismiss, but did not dissent from the majority’s approach to analyzing hub-and-spoke conspiracies.)

In reaching its decision, the Ninth Circuit noted the “strong incentives for plaintiffs to plead a horizontal conspiracy (either alone or as part of a rimmed hub-and-spoke conspiracy)” so that their Sherman Act claim falls under a per se analysis in which an unreasonable restraint of trade is presumed once an agreement’s existence is established. By insisting on the careful parsing of the vertical and horizontal elements of hub-and-spoke conspiracies, the court avoided blurring factual allegations of the vertical and horizontal agreements, allowing allegations about the former to boost the latter. Defendants facing such allegations of a hub-and-spoke conspiracy will likely rely on In re Musical Instruments in future litigations, and plaintiffs will likely need to plead specific allegations to support both the vertical and horizontal components of any alleged conspiracy. Merely pleading that competitors adopted similar pricing policies around the same time in response to similar market conditions—conscious parallelism—may be insufficient to plead a Section 1 violation.