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 Written Description Blog