The American Quarter Horse
is a breed that excels at sprinting over short distances—Quarter Horse
races may range from 220 to 870 yards. It is the most popular breed in
the United States, and the American Quarter Horse Association (AQHA),
headquartered in Amarillo, TX, is the largest horse breed registry in
the world. Because of the interest in this breed, Quarter Horses have
become the subject of commercial efforts at reproductive cloning. One company, Viagen,
has produced over 150 cloned foals. The cloning is achieved via somatic
cell nuclear transfer (SCNT), the technique that famously created Dolly
the Sheep. As some readers may be aware, Dolly was the focus of In re Roslin Institute (Edinburgh), 750 F.3d 1333 (2014), an important patentable subject matter eligibility case decided by the Federal Circuit last May.
While Roslin dealt with animal cloning and patent law, a recent Fifth Circuit case, Abraham & Veneklasen Joint Venture v. American Quarter Horse Association,
No. 13-11043, 2015 WL 178989 (Jan. 14, 2015) (Fifth Circuit Opinion),
addresses antitrust law issues raised by animal clones. AQHA registry is
essential for the owners of Quarter Horses to have profitable horse
breeding businesses. According to the Fifth Circuit, “[w]ithout access
to AQHA’s breed registry, . . . the cloned horses cannot participate in
the lucrative racing, breeding or horse shows.” Id. at *1. AQHA
registers horses born from in vitro fertilization and artificial
insemination techniques, but it does not allow the registration of
clones. Interestingly, the Jockey Club, which is the breed registry for
Thoroughbred horses in the United States, Canada, and Puerto Rico, does not allow registration of horses produced by any assisted or artificial reproduction techniques.
In contrast, cloned polo ponies are allowed to compete in events
alongside their natural-born counterparts. So AQHA is somewhere in
between.
The AQHA rule against clones states:
“Horses
produced by any cloning process are not eligible for registration.
Cloning is defined as any method by which the genetic material of an
unfertilized egg or an embryo is removed and replaced by genetic
material taken from another organism, added to/with genetic material
from another organism or otherwise modified by any means in order to
produce a live foal.”
Pursuant to AQHA procedures, this rule was
recommended by the organization’s Stud Book and Registration Committee
(SBRC) and presented to the AQHA’s general membership, which in turn
recommended submission of the rule to its Board for final approval. The
Board adopted this rule. A separate AQHA rule precludes from
registration any horse not born of registered horses, thereby banning
descendants of clones from registration as well.
The plaintiffs
(the Joint Venture and related entities), who own “shares of multiple
Quarter Horses that were produced by cloning top prize winners in racing
and cutting horse competitions,” filed suit against AQHA in the
Northern District of Texas for violating federal antitrust laws and
related state laws. Fifth Circuit Opinion at *1. According to the
complaint, cloning “is nothing more than an assisted reproductive
technique, similar to in vitro fertilization and artificial insemination
used widely in animal reproduction.” The complaint went on to allege
that “[c]ompetition in the market for high quality registered Quarter
Horses will continue to be restricted, suppressed and restrained” unless
continued enforcement of the rule against clones is enjoined.
The
district court denied AQHA’s motion to dismiss and then denied in
relevant part its motion for summary judgment. In the summary judgment
opinion, the court noted that “where a breed is already physically and
genealogically defined, there may be few justifiable reasons to exclude
animals that fit these parameters so perfectly that they are
indistinguishable from some of the breed’s champions.” Abraham & Veneklasen Joint Venture v. Am. Quarter Horse Ass’n,
No. 2:12-cv-103-J, 2013 WL 2297104, at *7 (N.D. Tex. May 24, 2013)
(District Court Opinion). The case proceeded to trial on Sherman Act
Section 1 claim of conspiracy in restraint of trade, Section 2 claim of
monopolization, and related state law claims. Specifically, the
plaintiffs’ Section 1 theory was that “members of the SBRC and the SBRC
conspired with AQHA to prevent cloned horses from being registered as
American Quarter Horses and thus excluded their horses from the market
for ‘elite Quarter Horses,’” Fifth Circuit Opinion at *2, and their
Section 2 theory was that “AQHA has monopoly power over the economically
viable Quarter Horse market because its rules control not only market
participation but whether, in turn, a horse is valuable or relatively
worthless,” District Court Opinion at *6.
The trial jury in
Amarillo found for the plaintiffs, but declined to award damages. The
district court denied AQHA’s motion for judgment as a matter of law and
entered an injunction “that specified the rule changes AQHA must adopt
to permit breed registration of cloned horses.” Fifth Circuit Opinion at
*2. AQHA appealed, arguing that a reasonable jury could not have found
for the plaintiffs because they failed to produce legally sufficient
evidence to support the elements of their Sherman Act claims. On appeal,
a unanimous panel of the Fifth Circuit, in an opinion written by Judge
Edith Jones and joined by Judges Grady Jolly and Lance Africk (Eastern
District of Louisiana, sitting by designation), agreed with AQHA,
reversed the district court’s judgment, and rendered judgment in AQHA’s
favor.
Fifth Circuit law holds that to prevail on a Section 1
claim, plaintiffs must demonstrate that defendants (1) engaged in a
conspiracy (2) that produced some anti-competitive effect (3) in the
relevant market. See id. at *3. Here, the verdict failed for lack of a
conspiracy. As an initial matter, the Fifth Circuit expressed grave
doubts about whether AQHA consists of multiple economic actors capable
of engaging in a conspiracy. Although the district court noted in its
summary judgment order that “there is evidence that the AQHA is the
conspiracy, because it is in fact controlled by competitors with
interests to ban clones,” District Court Opinion at *3, the Fifth
Circuit observed instead that “it is difficult to draw the conclusion
that because a tiny number of economic actors within AQHA may ‘pursue
their separate economic interests,’ the organization has conspired with
that minority,” Fifth Circuit Opinion at *4. The Fifth Circuit opined
that the case of American Needle, Inc. v. National Football League,
560 U.S. 183 (2010), where the Supreme Court held that NFL and NFL
Properties, the league’s intellectual property licensing arm, were
capable of engaging in a conspiracy within the meaning of Section 1 is
potentially distinguishable. The court characterized American Needle as
turning on the fact that, “apart from the teams’ agreement to cooperate
in exploiting [their intellectual property] assets, they would be
competitors in the market to produce and sell team logo wearing apparel
and headgear by licensing their intellectual property and dealing with
suppliers.” Fifth Circuit Opinion at *4. And the court reasoned that the
case before it is different because “AQHA is more than a sports league,
it is not a trade association, and its quarter million members are
involved in ranching, horse training, pleasure riding and many other
activities besides the ‘elite Quarter Horse’ market,” referring to
expert testimony that “no more than .5% of the yearlings sold each year
fall within the plaintiffs’ proposed sub-market of AQHA-registered elite
Quarter Horses.” Id. The Fifth Circuit also found it important that
“AQHA is not narrowly interested in ‘having more members and more
registered horses’” and “that its self-interest as an organization is
not limited to profit.” Id. at *5. Nonetheless, the court ultimately did
not reach this issue because it did not need to—it concluded that, even
if there were (for the sake of argument) multiple entities capable of
conspiring, there was insufficient evidence of a conspiracy.
In
support of the conspiracy element, the plaintiffs pointed to evidence
that some SBRC members owned elite Quarter Horses and thus stood to
benefit personally from the clone ban, that these members were
influential, and that they strongly opposed the registration of clones.
The plaintiffs also argued that a reasonable jury could have found that
AQHA’s proffered reasons for the clone ban that had nothing to do with
limiting competition, such as the concentration of genetic disease,
parentage verification, and moral objections, were pretextual. The
Fifth Circuit held, however, that the plaintiffs failed to show that
circumstantial evidence in the record both supports an inference of
conspiracy and tends to exclude independent conduct. It determined that
there was “conspicuous lack of evidence concerning the dozens of
committee members not financially involved in the elite Quarter Horse
market.” Id. at *7. The court concluded that “the evidence showed that
only a vocal minority of SBRC members both opposed cloning and had
financial interests that could be injured by registration of cloned
elite Quarter Horses,” which was not enough to establish a conspiracy.
Id. It further noted that the plaintiffs did not demonstrate that the
subgroup of elite Quarter Horse owners exerted a disproportionate
influence so as to affect vote outcomes within the SBRC or the Board.
And finally, the court determined that “[p]laintiffs offered nothing
more than pejoratives without evidence that the deliberative processes
in place deviated from AQHA’s standard procedures or failed to offer the
plaintiffs an opportunity to make their case for registering cloned
horses.” Id. at *9.
The Section 2 monopolization claim likewise
failed on appeal. Here, the Fifth Circuit concluded that the plaintiffs
failed to show that AQHA actually competes in the elite Quarter Horse
market. It noted that “AQHA is a member organization; it is not engaged
in breeding, racing, selling or showing elite Quarter Horses.” Id. at
*10. The court reiterated that because AQHA does not itself compete with
the plaintiffs, it could not be liable under Section 2. Because neither
Section 1 nor Section 2 claims could sustain the verdict, the Fifth
Circuit rendered judgment in favor of AQHA.
In their petition for
rehearing en banc, the plaintiffs contend that the “independent conduct”
defense does not make sense in this case because there was express
agreement—SBRC members actually sat down and voted for a clone ban. They
also fault the Fifth Circuit panel for failing to apply the rule that a
standard-setting organization like AQHA can be liable if it acts at the
behest of only a few competitors who capture the organization and use
it for anticompetitive purposes. Finally, they argue that there is no
requirement that an alleged monopolist be a participant in the market it
monopolizes—particularly when that alleged monopolist is a
standard-setting organization. Successful en banc petitions are
extremely rare, however, and it is likely that the Fifth Circuit’s
decision will stand, in which case Supreme Court review would be the
plaintiffs’ last hope. But unless the plaintiffs can convince the
Supreme Court that there is a circuit split on the legal issues on which
this case turns, the grant of certiorari is unlikely. (In their en banc
petition, the plaintiffs do identify a conflict between the approach of
this case and the Fourth Circuit’s reasoning in Robertson v. Sea Pines Real Estate Cos., 679 F.3d 278 (2012), on the independent conduct issue.)
This
case leaves us with many questions. Is an association like AQHA really a
standard-setting organization, or rather, as some language in the Fifth
Circuit’s opinion implies, a group of hobbyists that should be given
wide latitude in setting its own rules? To this point, early on in the
case AQHA attempted to invoke the doctrine of non-intervention, which
holds that “organizations are free to promulgate rules regarding
eligibility for and admission to membership.” Hatley v. Am. Quarter Horse Ass’n,
552 F.2d 646, 656 (5th Cir. 1977). But of course, the doctrine is
inapplicable where it is alleged that a voluntary association’s actions
are illegal.
Or, in a completely different vein, are clones
dangerous for the future of the breed? And even if they are not, are
ethical objections enough to exclude clones, and are such objections
well-grounded? And, on another note—and this is the question the Federal
Circuit had to address in Roslin—is the clone different from the source
animal, and if so, do the differences matter? As one Quarter Horse
enthusiast observed:
“If I cloned Rugged Lark, it wouldn’t be Rugged Lark. It might look
like him, but Rugged Lark became who he was because of the way he was
raised; what we did with him every day. I couldn’t even begin to do the
things we did. I don’t even remember half of what we did.”
The
Fifth Circuit did not reach these sorts of issues, only noting in
passing that “trial testimony established that SBRC members had ethical
concerns about cloning in addition to practical concerns about verifying
parentage to maintain the integrity of the registry.” Fifth Circuit
Opinion at *7. (And it is not clear in which direction, if either, the
issue of differences and similarities between clones would cut in this
case.) Nor did the court say much about the fact that AQHA registers
horses produced by artificial insemination and in vitro fertilization
techniques. Be that as it may, the court’s deference to AQHA’s internal
decision-making is unmistakable. Because the organization followed
proper procedure and provided plausible reasons for the clone ban that
were not anticompetitive, it insulated itself from antitrust liability
in spite of the jury verdict against it. Although I am not sure if this
case is an outlier in the antitrust world, the Fifth Circuit’s
willingness to give AQHA the benefit of the doubt is notable, especially
given the case’s procedural posture.
Note: Cross-posted on the Center for Law and the Biosciences Blog
