ABC Distributing, Inc. et al v. Living Essentials LLC et al

Filing 192

ORDER DENYING MOTION FOR CLASS CERTIFICATION; DENYING MOTION TO STRIKE EXPERT REPORT. Re: Dkt. Nos. #151 , #156 . Discovery Hearing and Case Management Conference set for 4/26/2017 01:00 PM in Courtroom 7, 4th Floor, San Jose. Signed by Judge Nathanael Cousins. (lmh, COURT STAFF) (Filed on 4/7/2017).

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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ABC DISTRIBUTING, INC., et al.,

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United States District Court
Northern District of California

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Plaintiffs,
v.

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LIVING ESSENTIALS LLC, et al.,
Defendants.

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Case No. 15-cv-02064 NC
ORDER DENYING MOTION FOR
CLASS CERTIFICATION;
DENYING MOTION TO STRIKE
EXPERT REPORT
Re: Dkt. Nos. 151, 156

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In this price discrimination case under the Robinson-Patman Act, plaintiffs allege

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that defendants sell 5-Hour Energy to wholesalers for different prices, to the disadvantage

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of small wholesalers. Plaintiffs seek to certify two classes of small wholesalers, defined by

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their competition with the large wholesaler, Costco. In response, defendants move to

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strike plaintiffs’ class certification expert report.
The Court finds that Dr. McDuff’s expert report is admissible at this stage, but

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rejects its recommendations and conclusions. Thus, the Court DENIES defendants’

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motion to strike the expert report. The Court also DENIES the motion for class

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certification because individual claims predominate over class-wide claims in a Robinson-

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Patman case. In addition, the classes are impermissibly vague because it is defined by

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proximity to Costco, a party neither in this case nor accused of any wrongdoing.

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//

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Case No. 15-cv-02064 NC

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I.

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BACKGROUND
Named plaintiffs ABC Distributing, Inc., Elite Wholesale, Inc., and Tonic

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Wholesale, Inc. are small wholesale food and sundry good distribution companies in

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California that supply products to local, independent businesses, such as grocery stores,

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convenience stories, and gas stations. SAC ¶ 7. Defendants Living Essentials, LLC and

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Innovation Ventures, LLC are Michigan companies, with their principal place of business

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in Michigan. Defendants manufacture 5-Hour Energy, a popular dietary supplement. SAC

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¶¶ 18, 32. For its sales to California-based wholesalers, defendants use a broker,

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Paramount, to negotiate sales. SAC ¶ 40.

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5-Hour Energy is sold as a liquid 1.93-ounce bottle, and all bottles that defendants

United States District Court
Northern District of California

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sell are of like grade and quality. SAC ¶¶ 32, 34. Defendants sell 5-Hour Energy to

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wholesalers in a package of twelve bottles, and master cases of eighteen twelve-packs.

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SAC ¶ 36. From 2011 to 2015, plaintiffs ordered 5-Hour Energy from defendants through

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Paramount. SAC ¶ 43. In 2011, plaintiffs Elite and ABC noticed that other wholesalers

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were consistently undercutting their prices for the sale of twelve-packs of 5-Hour Energy

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to retailers. SAC ¶ 45. Elice and ABC requested that Paramount provide a lower price,

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and Paramount agreed to give them an “everyday” discount of seven cents per bottle. SAC

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¶ 49.

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On June 30, 2015, ABC executives learned that Costco was selling 5-Hour Energy

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to other wholesalers for less than the price that ABC was purchasing 5-Hour Energy from

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defendants. SAC ¶ 65. ABC’s longtime customer, El Cajon Cash n Carry, purchased 5-

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Hour Energy at such a favorable price from Costco that it offered to resell 5-Hour Energy

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to ABC. SAC ¶ 67.

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Plaintiffs sue defendants for unlawful price discrimination under the Robinson-

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Patman Act and California state law. The Court denied a motion to dismiss in this case,

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finding that plaintiffs sufficiently alleged an antitrust injury. Dkt. No. 67. After limited

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discovery, plaintiffs now move for class certification. Dkt. No. 151. In support of their

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motion, plaintiffs present the expert report and testimony of Dr. DeForest McDuff. In
Case No. 15-cv-02064 NC
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opposition, defendants present the expert report and testimony of Dr. Darrell Williams.
All parties have consented to the jurisdiction of a magistrate judge. Dkt. Nos. 14,

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II.

DAUBERT MOTION

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Federal Rule of Evidence 702 provides that an expert witness may testify in the

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form of an opinion if “the testimony is the product of reliable principles and methods.”

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“The duty falls squarely upon the district court to ‘act as a gatekeeper to exclude junk

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science that does not meet Federal Rule of Evidence 702’s reliability standards.’” Estate

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of Barabin v. AstenJohnson, Inc., 740 F.3d 457, 463 (9th Cir. 2014) (quoting Ellis v.
Costco Wholesale Corp., 657 F.3d 970, 982 (9th Cir. 2011)). Rule 702 “assign[s] to the

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United States District Court
Northern District of California

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trial judge the task of ensuring that an expert’s testimony both rests on a reliable

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foundation and is relevant to the task at hand.” Daubert v. Merrel Dow Pharm., 509 U.S.

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579, 597 (1993).
The Court’s duty is to evaluate the soundness of the expert’s methodology, not the

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correctness of the expert’s conclusions. Primiano v. Cook, 598 F.3d 558, 564 (9th Cir.

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2010). “Shaky but admissible evidence is to be attacked by cross examination, contrary

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evidence, and attention to the burden of proof, not exclusion.” Id. The Court has broad

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discretion and flexibility in assessing an expert’s reliability. Estate of Barbarin, 740 F.3d

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at 463.

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Here, defendants move to strike plaintiffs’ expert, Dr. McDuff, on the basis that his

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report and testimony fail to establish both actual competition between proposed class

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members and antitrust injury. Dkt. No. 156. Defendants argue, “Dr. McDuff fails to make

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the necessary showings that would allow a single plaintiff under the Robinson-Patman Act

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to prove its claims at trial, let alone an entire class of wholesalers in California to prove

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their claims with common proof, on a class-wide basis.” Dkt. No. 156 at 6.

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The Court finds that these concerns are aimed at Dr. McDuff’s conclusions.

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Typically, the Court acts as a gatekeeper to excise methodologically unsound opinions

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because otherwise, there is a risk the jury could over rely on an unfounded opinion. See
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Daubert, 509 U.S. at 595 (“Expert evidence can be both powerful and quite misleading

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because of the difficulty in evaluating it”). Here, the motion is before the Court, and the

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parties have provided the Court with the expert reports and deposition testimony from both

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sides. As the Court is capable of reviewing the materials presented, identifying

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discrepancies, and evaluating the rigor of the expert’s analysis, the Court finds that the

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evidence is permissible at this stage. The motion to strike is DENIED.

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III. CLASS CERTIFICATION

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Plaintiffs claim defendants violated (1) the Robinson-Patman Act, § 13(a); (2) the
Robinson-Patman Act, § 13(d); (3) California Business and Professions Code § 17045; (4)
California Business and Professions Code § 17200; and (5) benefitted from unjust

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United States District Court
Northern District of California

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enrichment.

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Plaintiffs seek to certify two classes. First, under Rule 23(b)(3), plaintiffs seek

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certification of “All California wholesale businesses that purchased for re-sale, during the

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applicable limitations period, 5-Hour Energy through Living Essentials’ broker Paramount

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Ventures, Inc., where such wholesaler received Living Essentials’ $0.07/bottle ‘Everyday

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Discount,’ and is located in a zip code to which Costco Business Centers offered delivery.”

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Plaintiffs refer to this as the CBC Competitor Class. Dr. McDuff estimates that there are

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82 members in this class.

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Second, plaintiffs seek to certify the Costco Competitor Class under Rule 23(b)(2)

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defined as: “All California wholesale businesses that purchased for re-sale, during the

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applicable limitations period, 5-Hour Energy through Living Essentials’ broker Paramount

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Ventures, Inc., where such wholesaler received Living Essentials’ $0.07/bottle ‘Everyday

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Discount.’” Dr. McDuff estimates that there are 114 members of this class.

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A.

Legal Standard

Class certification requires that: (1) the class be so numerous that joinder of all

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members individually is impracticable; (2) there are questions of law or fact common to

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the class; (3) the claims or defenses of the class representative must be typical of the

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claims or defenses of the class; and (4) the person representing the class must be able to
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fairly and adequately protect the interests of all members of the class. Fed. R. Civ. P.

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23(a); Staton v. Boeing, 327 F.3d 938, 953 (9th Cir. 2003). Additionally, the requirements

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of at least one subsection of Rule 23(b) must be satisfied.

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“Rule 23 does not set forth a mere pleading standard.” Wal-Mart Stores, Inc. v.

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Dukes, 564 U.S. 338, 350 (2011). Instead, a plaintiff seeking class certification must

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demonstrate that there are sufficient facts to support his contention that class certification

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is appropriate. Id. “[S]ometimes it may be necessary for the court to probe behind the

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pleadings before coming to rest on the certification question.” Gen. Tel. Co. of Sw. v.

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Falcon, 457 U.S. 147, 150 (1982).

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United States District Court
Northern District of California

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B.

Rule 23 Analysis

For both proposed classes, the Court finds that the first requirement under Rule

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23(a) is satisfied. Each proposed class has enough proposed members that the joinder is

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impracticable.

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The second element requires questions of law or fact common to the class. “In Wal-

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Mart v. Dukes, the Supreme Court announced that this provision requires plaintiffs to

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demonstrate that the class members have suffered the same injury not merely violations of

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the same provision of law.” Parsons v. Ryan, 754 F.3d 657, 674-75 (9th Cir. 2014) (citing

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Dukes, 564 U.S. at 349). Here, plaintiffs’ proposed classes both suffer from the same fatal

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flaw— a Robinson-Patman case is not well suited for class certification because its

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analysis is “singularly individualistic.” See Mad Rhino, Inc. v. Best Buy Co., No. 03-cv-

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5604 GPS, 2008 WL 8760854, at *4 (C.D. Cal. Jan. 14, 2008). In order to evaluate

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whether there are common questions of law or fact, the Court briefly summarizes the

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applicable law.

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As to a secondary-line Robinson-Patman claim, plaintiffs must prove that (1) the

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relevant 5-Hour Energy sales were made in interstate commerce; (2) 5-Hour Energy sold

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to favored and disfavored customers is of “like grade and quality”; (3) defendants

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“discriminated in price between” plaintiffs and other purchasers of 5-Hour Energy; and (4)

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“the effect of such discrimination may be . . . to injure, destroy, or prevent competition” to
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the advantage of the favored purchaser. Volvo Trucks N. Am., Inc. v. Reeder-Simco GMC,

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Inc., 546 U.S. 164, 176 (2006); 15 U.S.C. § 13(a).

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The third element requires plaintiffs to prove that defendants discriminated in price

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between favored and disfavored purchasers of 5-Hour Energy. Volvo, 546 U.S. at 176. “A

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hallmark of the requisite competitive injury, our decisions indicate, is the diversion of sales

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or profits from a disfavored purchaser to a favored purchaser.” Id. at 177.

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Plaintiffs’ state law price discrimination claim requires proof that (1) there is a

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“secret” allowance of an “unearned” discount; (2) injury to a competitor; and (3) the

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allowance must tend to destroy competition. Cal. Bus. & Prof. Code § 17045; Diesel Elec.

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United States District Court
Northern District of California

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Sales & Serv., Inc. v. Marco Marine San Diego, Inc., 20 Cal. Rptr. 2d 62, 67 (2012).
As applied to class certification, the Court finds Judge Schiavelli’s analysis in Mad

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Rhino, Inc. v. Best Buy Co. to be insightful and persuasive. 2008 WL 8760854. Judge

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Schiavelli noted that in order for a plaintiff to prove actual injury and damages in a

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Robinson-Patman claim, “the plaintiff must show that there was actual competition

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between the favored and disfavored customers and that defendants’ discriminatory

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practices likely had a harmful effect on the competition. By its very nature, such proof is

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singularly individualistic.” 2008 WL 8760854, at *4. (citations omitted).

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The undersigned agrees with this analysis and finds that class certification is

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impractical for two reasons. First, the economic proof required to demonstrate that a class

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is typical and ascertainable in a price discrimination class creates a class definition that is

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impermissibly vague and confusing. Plaintiffs must define a class that is both disfavored

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and competes with the same favored purchaser(s). This requires not one but two

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relationships to exist: (1) a disfavored relationship between plaintiffs and defendants, and

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(2) a competitive relationship between plaintiffs and a single or multiple third-party

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favored competitors. The classes proposed by plaintiffs attempt to do all of these things,

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but the result is a class that apparently only Dr. McDuff and possibly Living Essentials are

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capable of identifying. From the proposed class definitions, it would not be readily

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apparent to a plaintiff if it qualified for the class.
Case No. 15-cv-02064 NC

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Plaintiffs try to ameliorate this necessarily vague class definition by pointing to

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internal documents from Living Essentials, suggesting that Living Essentials treated the

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two categories of wholesalers differently. Perhaps if plaintiffs could point to an internal

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pricing document where defendants clearly distinguished between two categories of

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wholesale customers, the class definition could take on a clearer shape. However,

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plaintiffs’ evidence of internal emails confirming that Costco was receiving a price

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advantage is not the smoking gun that can cure the above-identified deficiency.

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Second, as noted by Judge Schiavelli, the Robinson-Patman Act and plaintiffs’ state
law claim require particularized showings of injury, discrimination, and damages. Here,
plaintiffs will need to demonstrate that each class member received a lower price than

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United States District Court
Northern District of California

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Costco during the class period, and that they in fact competed with Costco for customers.

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Volvo, 546 U.S. at 177. Dr. McDuff’s damages theory for class certification is that if a

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putative class member operates within a zip code to which a Costco Business Center

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delivers, then the class member and Costco are in competition. Even assuming the

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economic and methodological soundness of Dr. McDuff’s opinion, the Court is concerned

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that the zip code theory is an oversimplification of the applicable law and burden of proof

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in a Robinson-Patman case. See Bel Air Markets v. Foremost Dairies, Inc., 55 F.R.D. 538,

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541 (N.D. Cal. 1972) (“The question whether a disfavored Foremost purchaser competed

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with a Lucky store will have to be individually proved since none of the disfavored

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customers can be assumed to have competed with a Lucky store”). Because this case

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requires individualized proof of harm, class certification is inappropriate.

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Likewise, as the state law claims of unlawful competition under California Business

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and Professions Code § 17200 and unjust enrichment are dependent on the price

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discrimination claims, the Court finds class certification of the state law claims similarly

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inappropriate.

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IV. CONCLUSION

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The Court DENIES the defendants’ motion to strike the expert testimony of Dr.
McDuff at this stage. Considering the arguments and evidence presented, the Court finds
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that a price discrimination case such as this one is an ill-fit for class certification.

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Ultimately, there are not common questions of law and fact, as price discrimination cases

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require an individualized showing of competition and injury. Plaintiffs’ motion to certify a

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class is DENIED.

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The parties have a pending discovery dispute which will be heard on April 26,

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2017, at 1:00 p.m. At that time, the Court will hold a case management conference to

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discuss any changes to the case schedule and the scope of future discovery.

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IT IS SO ORDERED.

United States District Court
Northern District of California

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Dated: April 7, 2017

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_____________________________________
NATHANAEL M. COUSINS
United States Magistrate Judge

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Case No. 15-cv-02064 NC

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