When Is a Petition Not a Petition? "Sham" Liability for Pursuing Anticompetitive Government Action

By Rochelle L. Wilcox

Government action or inaction can have a significant impact on any industry, but in a highly regulated industry such as telecommunications, the direct impact of government activity is simply unavoidable. Even as the telecommunications industry moves from a monopoly model to a more competitive and deregulated environment, government involvement presents telecommunications companies with an opportunity to use, or abuse, the processes of government to injure their competitors. The abuse of government processes to injure competitors can constitute anticompetitive activity, which can lead to liability under the Sherman Act.¹ Considering the harsh sanctions available to punish anticompetitive activity,² telecommunications carriers should be aware of the point at which legitimate opposition directed against a competitor in Federal Communications Commission or state commission proceedings could be construed as a Sherman Act violation.

The line between use and abuse of the process-and thus the line between legitimate pursuit of one's interests and antitrust liability-is the subject of the Noerr-Pennington doctrine.³ An application of the First Amendment's guarantee of the right to petition the government, the Noerr-Pennington doctrine protects from antitrust liability persons who seek action from any branch of the state or federal government, so long as a favorable result legitimately is sought. Where the resort to government processes is a mere "sham" or cover for anticompetitive behavior, however, the protection does not apply. The difficulty arises in determining what is a "sham." This was the issue addressed by the Ninth Circuit recently in Kottle v. Northwest Kidney Centers.⁴

Kottle involved a business dispute between Northwest Kidney Centers ("Northwest"), then the sole provider of kidney dialysis services in the Seattle area, and King County Kidney Centers ("KCKC"), a prospective competitor. Under state law, the Department of Health regulates the opening of new health care facilities to ensure that facilities meet existing needs. KCKC applied for permission to open a new kidney dialysis center in the Seattle area. The Department held a public hearing, at which it invited comments by affected parties. Northwest and others appeared and opposed KCKC's application, suggesting that another facility was unnecessary in the market. The Department denied KCKC's application and KCKC did not seek review, although it was entitled to do so.

Three years later, Northwest itself applied for permission to open a second dialysis facility in the region. Kottle-who asserted that he was associated with KCKC-subsequently filed an antitrust action against Northwest. Kottle claimed that Northwest "made false statements of fact and misrepresentations about Kottle . . . and encouraged others to do so."⁵ Specifically, Kottle asserted that Northwest intentionally misrepresented to the Department that there was no need for kidney dialysis services when KCKC filed its application, and that this intentional misrepresentation was revealed by Northwest's own application three years later to open a new dialysis facility. Because Northwest's actions involved petitioning the government (its actions were directed at an administrative agency, in an attempt to influence that agency's decision), the court applied the Noerr-Pennington doctrine to analyze Kottle's claims.

The Origin and Extent of the Noerr-Pennington Doctrine

[W]here a restraint upon trade or monopolization is the result of valid governmental action, as opposed to private action, no violation of the [Sherman] Act can be made out. [This is so because] under our form of government the question whether a law of that kind should pass, or if passed be enforced, is the responsibility of the appropriate legislative or executive branch of government so long as the law itself does not violate some provision of the Constitution.⁶

This premise forms the basis of the Noerr-Pennington doctrine,⁷ an exception to the Sherman Act's prohibition of acts in restraint of trade. Under Noerr-Pennington, persons are immune from antitrust liability if their activities are directed to the government and intended to influence governmental action, even though the action sought will affect a petitioner's competitors. For example, in Noerr, the Supreme Court found that the defendants could avoid Sherman Act liability for their legislative lobbying activities because the activities actually were intended to influence the legislature.⁸ The Noerr Court enunciated two reasons for its decision. First, attempts to influence legislative bodies are inherently political, and nothing in the history of the Sherman Act reflected a purpose to regulate political activities. Second, and equally significant, the First Amendment guarantees the right to petition the government, and the Court could not impute to Congress an intent to invade this right.⁹ Even in Noerr, however, the Court recognized the possibility that action aimed at altering government behavior could be a "sham," and thus warrant imposition of Sherman Act liability.¹⁰

Since Noerr, the courts have made clear that the Noerr-Pennington doctrine provides immunity to efforts aimed at influencing any branch of the government, whether legislative,¹¹ executive,¹² or judicial.¹³ Furthermore, because it is grounded in the First Amendment, Noerr-Pennington protects petitioning activities before both federal and state governments.¹⁴ The most difficult decisions under this doctrine have involved the extent of the "sham" exception. Unlike the remainder of the doctrine, which sets forth clear lines for immunity, the sham exception requires a factual inquiry and balancing of competing interests. In addition, because the three branches of the government operate in vastly different ways, the scope of the "sham" exception varies from branch to branch.

The Kottle Decision In Kottle, the court faced the issue of "whether the 'sham' exception is different in an administrative proceeding than in litigation."¹⁵ Kottle based his claim against Northwest on presentations by Northwest to the Department of Health, an administrative agency, which were admittedly designed to influence the decision by that agency. Northwest moved to dismiss the complaint, claiming that its actions were protected by the Noerr-Pennington doctrine, and the district court agreed. Kottle appealed to the Ninth Circuit Court of Appeals. The Court of Appeals began by holding that Northwest's activities, which were designed to influence a state administrative agency, were presumptively protected by the Noerr-Pennington doctrine. The court then addressed Kottle's primary claim-that Northwest lost its immunity because its actions fell within the sham exception. Initially, the court quoted the Supreme Court in describing an unprotected "sham" as one "in which persons use the governmental process-as opposed to the outcome of that process-as an anticompetitive weapon."¹⁶ The Kottle court noted, however, that a different standard had to be applied, depending on the branch of government to which the activities were directed. Because there are few objective standards in politics, "the sham exception is extraordinarily narrow" for actions aimed at the legislature.¹⁷ On the other hand, misrepresentations are not tolerated in judicial proceedings. Accordingly, the scope of the sham exception is broader (and the protections afforded are correspondingly narrower) when the petitioning activity takes place in a judicial context.

The question, therefore, was whether Northwest's petitioning before the Department of Health, which is part of the executive branch, should be governed by the standards applicable to the legislative branch or by those applicable to the judicial branch. Administrative agencies can perform either legislative or quasi-judicial functions, and often their activities will fall somewhere on the spectrum between the two extremes. The court found that the Ninth Circuit's case law has "generally shaped the sham exception according to [its] estimation of whether the executive entity in question more resembled a political entity."¹⁸ The basic inquiry is whether the agency is governed by articulable and enforceable standards in its decision-making processes. Thus, the greater the restraints on the agency's discretion, the more likely it is that the agency will be deemed adjudicative in nature, and governed by the standards applicable to the judicial branch.¹⁹ In applying this test to the Department of Health, the Kottle court found that the agency functioned more like the judicial branch, in that its decision-making process was governed by explicit standards: It held public hearings, accepted written and oral arguments, permitted representation by counsel, allowed affected persons to question witnesses, and was required to issue written findings.

Having found that the Department should be governed by judicial standards, the court then proceeded to apply those standards. The Ninth Circuit's case law had previously recognized three ways in which a defendant might lose immunity under the sham exception. First, if the lawsuit is "(1) objectively baseless, and (2) a concealed attempt to interfere with the plaintiff's business relationships," it falls within the sham exception.²⁰ The Kottle court found that this exception clearly did not apply, because Northwest prevailed in the administrative proceeding and "a winning lawsuit is, by definition, not objectively baseless."²¹Second, "if the alleged anticompetitive behavior is the filing of a series of lawsuits, 'the question is not whether any one of them has merit-some may turn out to, just as a matter of chance-but whether they are brought pursuant to a policy of starting legal proceedings without regard to the merits and for the purpose of injuring a market rival.'"²² The Kottle court also quickly dismissed this ground for application of the sham exception, because the complaint identified only two instances of alleged sham petitioning. Finally, "if the alleged anticompetitive behavior consists of making intentional misrepresentations to the court, litigation can be deemed a sham if 'a party's knowing fraud upon, or its intentional misrepresentations to, the court deprive the litigation of its legitimacy.'"²³ In his complaint, Kottle alleged that Northwest made misrepresentations regarding the need for kidney dialysis centers that caused the Department to deny the applications. The court found, however, that the complaint fell far short of adequately alleging this variant of the sham exception. Kottle failed to provide the specifics necessary to evaluate his claim-the who, what, when and where of the alleged misrepresentations. The Kottle court applied a higher standard than is normally applied in evaluating the sufficiency of a complaint because Kottle's claim involved a challenge to the exercise of First Amendment rights. Thus, the court reiterated the general rule that in order to bring such a challenge plaintiffs must provide specific allegations of the claimed wrongdoing, because "the danger that the mere pendency of the action will chill the exercise of First Amendment rights requires more specific allegations than would otherwise be required."²⁴ This "heightened pleading standard" means that without the requisite specificity, a plaintiff's complaint will be dismissed. The court found that Kottle could not meet this higher pleading standard, even if given an opportunity to amend his complaint, so it dismissed the action entirely.

The Significance of Kottle

The Kottle decision is significant for a number of reasons. First, it clearly enunciates the standard by which a court determines whether to apply legislative or judicial standards to an administrative agency. Because the extent of an agency's decision-making discretion is usually ascertainable, persons petitioning an agency can anticipate the standard that will be applied, and thus whether Noerr-Pennington will protect their actions. This is particularly significant in light of the deregulation of the telecommunications industry, because the petitioning process is a fundamental aspect of this Act.²⁵

In addition, Kottle sets forth the tests for determining the scope of the "sham" exception as applied to petitions to the judicial branch. By clearly enunciating the three situations in which the exception will be applied, the court made plain that lawsuits outside of those situations should be protected from antitrust liability by Noerr-Pennington, even if the lawsuits are anticompetitive.

Finally, Kottle applies the heightened pleading standards to activities protected by Noerr-Pennington and reaffirms the importance of disposing of complaints that seek to curtail First Amendment freedoms. Because petitioning the government is protected by the First Amendment, it is appropriate that it should be given heightened procedural protections. Thus, despite the breadth and strength of the Sherman Act and the cases interpreting it, the Kottle court found-appropriately-that the First Amendment must prevail.

1. 15 U.S.C. §§ 1, 2.

2. See id. at § 15 (authorizing award of treble damages, attorneys fees and costs for violation of antitrust laws).

3. Eastern Railroad Presidents Conference v. Noerr Motor Freight, 365 U.S. 127 (1961), United Mine Workers v. Pennington, 381 U.S. 657 (1965).

4. 146 F.3d 1056 (9th Cir. 1998). Douglas C. Ross and Bergitta K. Trelstad, attorneys in the Seattle office of Davis Wright Tremaine, represented the defendant, Northwest Kidney Centers.

5. Id. at 1058.

6. Eastern Railroad Presidents Conference v. Noerr Motor Freight, 365 U.S. 127, 136 (1961).

7. The doctrine was enunciated in Noerr as applying to actions aimed at influencing legislation. In United Mine Workers v. Pennington, 381 U.S. 657 (1965), the Court affirmed its holding in Noerr and expanded the doctrine to encompass actions designed to influence administrative decisions.

8. See Noerr, 365 U.S. at 145.

9. See id. at 137-38.

10. See id. at 144 ("[t]here may be situations in which a publicity campaign, ostensibly directed toward influencing governmental action, is a mere sham to cover what is actually nothing more than an attempt to interfere directly with the business relationships of a competitor and the application of the Sherman Act would be justified").

11. See id.

12. See Pennington, 381 U.S. 657 (1965) (efforts to influence Secretary of Labor's decision regarding minimum wage and buying practices of Tennessee Valley Authority are immune from Sherman Act liability); California Motor Transport Co. v. Trucking Unlimited, 404 U.S. 508, 511 (1972).

13. See California Motor Transport, 404 U.S. 508; Professional Real Estate Investors v. Columbia Pictures Industries, 508 U.S. 49 (1993) (litigation immune from Sherman Act liability so long as it is not "objectively baseless").

14. See, e.g. Pennington, 381 U.S. 657 (action to influence federal agency); Noerr, 365 U.S. 127 (action to influence state legislation).

15. 146 F.3d at 1058.

16. Id. at 1060 (quoting City of Columbia v. Omni Outdoor Advertising, Inc., 499 U.S. 365, 380 (1991)). A good example of improper means can be found in California Motor, 404 U.S. at 511, where the defendants instituted proceedings in state and federal agencies merely to "clog up the systems," and prevent their competitors from having access to the agencies for approval of their operating license applications. Thus, the petitions were filed not to achieve the ends enunciated in the petition, but rather to increase the agencies' workloads and prevent the agencies from considering new applications.

17. Kottle, 146 F.3d at 1061.

18. Id.

19. Id. at 1061-62 (citations omitted).

20. Id. at 1060.

21. Id. at 1063 (citing Professional Real Estate Investors, Inc. v. Columbia Pictures Industries, Inc. 508 U.S. 49, 61, n.5).

22. Id. at 1060 (quoting USS-POSCO Indus. v. Contra Costa County Bldg. & Constr. Trades Council, 31 F.3d 800, 811 (9th Cir. 1994)).

23. Id. at 1060 (quoting Liberty Lake Inv., Inc. v. Magnuson, 12 F.3d 155, 158 (9th Cir. 1993)).

24. Id. (quoting Franchise Realty Interstate Corp. v. San Francisco Local Joint Executive Bd. of Culinary Workers, 542 F.2d 1076, 1083 (9th Cir. 1976)).

25. For example, under 47 U.S.C. § 271, reginal bell operating companies are given the opportunity to enter the long distance market if they can demonstrate that they have adequately opened their network to competitors. See 47 U.S.C. § 271(c)(2)(B).The process by which an entity seeks permission to enter the long distance market invites comments by competitors, arguably anticompetitive in nature. See also Application by BellSouth Corporation, et. al. Pursuant to Section 271 of the Communications Act of 1934, as amended, to Provide In-Region, InterLATA Services in South Carolina, CC Docket No. 97-208, FCC 97-418 (rel. Dec. 24, 1997).