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Discovery Rule is Better Accrual Standard for Antitrust Claims

Competition Law360
February 8, 2017

By Eric W. Buetzow and Michael Christian
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The Clayton Act creates a federal civil cause of action for anti-competitive business practices. The act as originally passed in 1914, however, did not include a statute of limitations. Thus, for approximately 40 years, courts relied on the statutes of limitations from the state where the action was pending.[1] This resulted in varying limitations periods and forum shopping, which Congress sought to remedy by passing a uniform limitations period in 1955.[2] Specifically, 15 U.S.C. § 15b provides that a federal antitrust claim must be commenced within four years of the date that the cause of action accrued.

In order to determine when the four-year limitations period begins to run, a court must first determine when the cause of action accrues. There are two rules that may potentially apply to determine when a cause of action accrues — the “injury rule” and the “discovery rule.”

When the injury rule is applied, the limitations period begins to run on the date a plaintiff is injured, irrespective of whether the plaintiff is actually aware of the injury. Under the discovery rule, in contrast, the statute of limitations begins running only when the plaintiffs could have reasonably discovered (or actually did discover) that they were injured. Most courts consider the injury rule as the “general rule” of accrual in antitrust cases.[3] The discovery rule, however, is beginning to gain some traction in district courts, and is the law in the Seventh Circuit.[4] Because there is authority supporting both accrual rules, the issue of which rule should apply is becoming more frequently litigated. When examining the two rules, it is apparent that the discovery rule has two major advantages over the injury rule: fairness and consistency.

Fairness

The discovery rule was first applied as the general federal rule of accrual in cases involving fraud.[5] The rule was subsequently expanded to apply beyond fraud cases based largely on principles of fairness and equity.[6] Ultimately, the discovery rule was expanded so that it is now used by at least one circuit as the default rule in federal litigation.[7] While not yet widely adopted in the federal antitrust context, the discovery rule can overcome the unfairness that can occur when the injury rule is applied, as has been the historical justification for this rule in the tort context.

Under the injury rule, the cause of action accrues on the date of injury. Plaintiffs, however, are often unaware of any injury due to the inherently secretive nature of an antitrust conspiracy, including in the typical example of a price-fixing cartel. As a practical matter, conspirators regularly conceal antitrust conspiracies in order to effectuate the anti-competitive scheme, maximize profit, and avoid civil and criminal prosecution.

Because plaintiffs are frequently unaware of the existence of an antitrust conspiracy for several years, the application of the injury rule often requires them to prove fraudulent concealment in order to toll the date of accrual. In many courts, however, a plaintiff must allege specific acts of concealment in order to prove fraudulent concealment.[8]

Typically, an antitrust defendant will invoke the statute of limitations defense at the motion-to-dismiss stage of the litigation, before any discovery has been taken. At that stage, plaintiffs will not have had the opportunity to conduct discovery, and thus may have limited knowledge regarding the specific nature of a defendant’s concealment. Thus, use of the injury rule can lead to dismissal of an otherwise valid claim on statute of limitations grounds, even where a defendant did engage in fraudulent concealment of the conspiracy. In other words, a plaintiff’s claim may be barred in spite of his diligence, while a defendant could be heavily rewarded for concealing antitrust violations. In addition to being unfair to injured plaintiffs, application of the injury rule also contravenes the U.S. Department of Justice’s efforts to encourage prompt disclosure of antitrust conspiracies by virtue of its leniency program.[9]

Application of the discovery rule would avoid the unfairness that can occur with the use of the injury rule. With the discovery rule, a cause of action accrues only when the plaintiff reasonably could have, or actually did, learn of an antitrust injury. Although the U.S. Supreme Court has not adopted the discovery rule in antitrust cases, it has recognized that the discovery rule provides a fairer outcome where parties, through no lack of diligence on their part, cannot reasonably be expected to discover an injury that has been concealed:

The discovery rule exists in part to preserve the claims of victims who do not know they are injured and who reasonably do not inquire as to any injury. Usually when a private party is injured, he is immediately aware of that injury and put on notice that his time to sue is running. But when the injury is self-concealing, private parties may be unaware that they have been harmed. Most of us do not live in a state of constant investigation; absent any reason to think we have been injured, we do not typically spend our days looking for evidence that we were lied to or defrauded. And the law does not require that we do so. Instead, courts have developed the discovery rule, providing that the statute of limitations in fraud cases should typically begin to run only when the injury is or reasonably could have been discovered.[10]

Not only does the injury rule frequently result in the type of unfairness disfavored by the U.S. Supreme Court, but it also incentivizes conspirators to conceal the conspiracy past the four-year limitations period. If a defendant can avoid detection until that statute has run, it can potentially reap the profits of the conspiracy and avoid civil liability for the resulting injury inflicted upon private victims. Application of the discovery rule would avoid this unfairness, and provide antitrust violators no additional reward for concealing their conduct.

Consistency

At first glance, the injury rule seems to provide certainty and consistency. Under the injury rule, an antitrust cause of action accrues on the date of injury, and the statute of limitations expires four years after that date. The actual application of the injury rule, however, is far from consistent because, as mentioned above, plaintiffs typically invoke the fraudulent concealment doctrine in an effort to toll the accrual date.[11] Inconsistencies arise because there is a great deal of divergence among federal courts on how to prove fraudulent concealment. In some circuits, a plaintiff must prove an affirmative act by the defendant, separate from the antitrust activity.[12] Other circuits, in contrast, recognize that the essential nature of an antitrust conspiracy is “self-concealing,” and do not require proof of any concealment activity.[13] At least one federal circuit has expressly referred to a “separate-and-apart” standard which requires that the defendant’s concealing activity be completely separate from the underlying antitrust violation, but still conducted in furtherance of the conspiracy.[14] In addition to these inter-circuit splits, many other circuits are divided internally.[15] Because the courts currently disagree on how and when the antitrust statute of limitations is tolled under the doctrine of fraudulent concealment, courts take differing views on when the limitations period begins to run.

Not only does the injury rule create inconsistencies between different courts, but these inconsistencies may encourage forum shopping on behalf of plaintiffs seeking more lenient burdens of proof regarding fraudulent concealment. These types of jurisdictional variances and forum shopping run directly contrary to the purpose of the Clayton Act’s four-year statute of limitations, which was enacted in order to create uniformity and discourage forum shopping.[16]

The discovery rule, in contrast, would provide more uniformity and certainty. Under the discovery rule, the limitations period begins to run when the plaintiff was or reasonably should have been aware of the injury. Admittedly, the sufficiency of certain facts to place a plaintiff on notice of when he or she should have been reasonably aware of an antitrust violation will often be subject to litigation. Under the injury rule, however, parties likewise must ultimately still litigate the sufficiency of facts under the fraudulent concealment doctrine, but the legal standards will also continue to vary among different courts. Thus, federal adoption and application of discovery rule should help provide much needed certainty and consistency in the law, while allowing for fair litigation of the underlying facts.

Conclusion

When it comes to federal antitrust claims — characteristically dominated by secretive and purposefully concealed conduct — the uniform adoption and application of the discovery rule as the accrual standard presents a wise course. Indeed, it would both address the unduly harsh results imposed on private plaintiffs (often complete forfeiture of damage claims) through no fault of their own, as well as provide much needed homogeneity across the federal courts. In these important respects, the approach offered by application of the discovery rule is more aptly suited for the antitrust context than the continued combination of the injury rule and the fraudulent concealment doctrine.

—Eric Buetzow, Zelle LLP

Eric Buetzow is a senior associate and Michael Christian was a partner in the San Francisco office of Zelle.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] See Amber Davis-Tanner, Antitrust Law – Affirmative Acts and Antitrust – The Need for a Consistent Tolling Standard in Cases of Fraudulent Concealment, 33 U. Ark. Little Rock L. Rev. 331 (2011).

[2] Id.

[3] See, e.g., Zenith Radio Corp. v. Hazeltine Research, Inc., 401 U.S. 321, 338 (1971).

[4] See, e.g., In re Copper Antitrust Litigation, 436 F.3d 782, 789 (7th Cir. 2006); Fenerjian v. Nongshim Co., Ltd., 72 F. Supp. 3d 1058 (N.D. Cal. 2014); In re Processed Egg Prods. Antitrust Litig., 931 F. Supp. 2d 654, 657 (E.D. Pa. 2013).

[5] See Bailey v. Glover, 88 U.S. 342, 348-49 (1874).

[6] See Holmberg v. Armbrecht, 327 U.S. 392, 397 (1946); Moviecolor Ltd. v. Eastman Kodak Co., 288 F.2d 80, 83 (2nd Cir.), cert. denied, 368 U.S. 821 (1961).

[7] See, e.g., Mangum v. Action Collection Serv., Inc., 575 F.3d 935, 940 (9th Cir. 2009).

[8] Davis-Tanner at 332.

[9] See https://www.justice.gov/atr/leniency-program.

[10] See Gabelli v. Sec. & Exch. Comm’n, 133 S. Ct. 1216, 1222 (2013).

[11] Plaintiffs often allege application of the discovery rule and fraudulent concealment concurrently. [12] Davis-Tanner at 332.

[13] Id.

[14] Id.

[15] Id.

[16] See H.R. Rep. No. 422, 84th Cong., 1st Sess. (1955).

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