United States: American Quarter Horse Association Can Ban Cloned Horses, Says Fifth Circuit, Rejecting Antitrust Challenge

The Fifth Circuit Court of Appeals has affirmed the American Quarter Horse Association's right to bar cloned horses from its breed registry, reversing a jury verdict against the association. The case is Abraham & Veneklasen Joint Venture v. American Quarter Horse Association. This ruling has wide-reaching antitrust implications for sports leagues, standard-setting organizations, and other associations of competitors joined to promote a common objective and provides key guidance for such organizations hoping to avoid antitrust liability.

Background

The American Quarter Horse Association ("AQHA") is a non-profit association established in 1940 to promote the preservation, improvement, and record-keeping of the American Quarter Horse. The AQHA has over 280,000 members worldwide and millions of American Quarter Horses in its registry. Only horses listed in the AQHA registry can participate in AQHA-sanctioned races, a multimillion dollar industry. The AQHA is run by its Board of Directors, a five-member Executive Committee, and numerous standing committees. One standing committee is the Stud Book and Registration Committee ("SBRC"), with 30 members, which reviews proposed changes to the AQHA's equine registration rules and make recommendations to the AQHA Board of Directors.

In 2003, scientists in Italy used a process called Somatic Cell Nuclear Transfer ("SCNT") to clone a horse. Shortly thereafter, the AQHA Board a rule that provides that "horses produced by any cloning process are not eligible for [AQHA] registration." This "no-clones" rule prevents cloned horses or their offspring from racing in AQHA-sanctioned events, significantly decreasing their economic value.

The plaintiff, Jonathan Abraham, owned several cloned Quarter Horses and desired to race them in AQHA-sanctioned events. He made several proposals to the SBRC that the AQHA allow cloned horses to be registered, but each time the SBRC voted to retain the no-clones rule, and each time the AQHA's membership and Board of Directors adopted the SBRC's recommendation.

Abraham sued the AQHA in the U.S. District Court for the Northern District of Texas in 2012, alleging that the AQHA's refusal to register cloned horses violated Sherman Act § 1, Sherman Act § 2, and Texas state law. Important to the outcome of this lawsuit, Abraham did not claim that the AQHA restrained trade in the entire Quarter Horse market, but instead alleged harm in a much narrower market, so-called "elite Quarter Horses" used in racing and breeding.

Before trial, AQHA moved for judgment as a matter of law, which the district court denied. After a one-week trial, the jury returned a verdict for Abraham on all counts, though it awarded no damages. Following the jury's decision, AQHA appealed the district court's denial of its motion for judgment as a matter of law.

Fifth Circuit Decision

On appeal, the Fifth Circuit reversed and rendered judgment in favor of AQHA. The court concluded that the AQHA's prohibition on registration of cloned horses did not violate Sherman Act § 1 (which prohibits agreements that unreasonably restrain competition), Sherman Act § 2 (which prohibits monopolization through anticompetitive conduct), or Texas state antitrust laws (which follow the federal Sherman Act).

Single Entity Status under Sherman Act § 1

A Section 1 claim requires there be an agreement among independent entities, such as between separate competitors. The AQHA argued that it is a single entity, incapable of conspiring with itself, and therefore could not violate Section 1. The Fifth Circuit struggled with this issue. It acknowledged the 2010 American Needle v. NFL case, in which the U.S. Supreme Court held that the decision by the 32 National Football League teams collectively to license their independently-owned intellectual property through a joint venture was collective conduct by the teams, not just the conduct of the league as a single entity, and therefore potentially could violate Section 1.

Unlike the NFL, the AQHA has a quarter-million members whose interests range far beyond the "elite Quarter Horse" market, including ranching, training, and pleasure riding. The Fifth Circuit seemed skeptical that an organization with a 30-member committee that only makes recommendations to a 300-member Board of Directors could conspire with "legally distinct members." However, the court did not decide whether the AQHA was a single entity; it assumed for the sake of argument that it was not.

Lack of Evidence of a Conspiracy

The Fifth Circuit instead rejected the Section 1 claims because Abraham failed to provide sufficient evidence of a conspiracy. Abraham had alleged a narrower market than all Quarter Horses and therefore had to show that the AQHA agreed to restrain competition in "elite Quarter Horses." At trial, Abraham pointed to five "influential" members of the SBRC who spoke out against the proposals to allow cloned horses. These five members each held significant interests in the "elite Quarter Horse" market and stood to benefit financially from excluding cloned horses from the AQHA registry. Abraham separately argued that there was an "agreement" within the SBRC to prevent cloned horses from being registered, pointing to handwritten notes purporting to show a "strategy" to defeat the proposals, and claimed the SBRC instituted "sham" procedures to prevent proper consideration of cloning proposals.

The Fifth Circuit disagreed. Noting a plaintiff's burden to present evidence "tending to exclude the possibility of independent conduct," the court determined Abraham had only proven that a handful of members of the SBRC had financial interests in "elite Quarter Horses," not that there was a conspiratorial agreement among the entire SBRC. The court pointed to a "conspicuous lack of evidence" of any conspiracy among the other two dozen committee members who had no financial interests in "elite Quarter Horses," each of whom had independent reasons for excluding cloned horses from the AQHA registry, including ethical concerns regarding cloning. As a result, the Fifth Circuit concluded that reasonable jurors could not have from the evidence at trial drawn any inference of a conspiracy to restrain trade in "elite Quarter Horses" and dismissed Abraham's Section 1 claims.

No Monopolization in "Elite Quarter Horses" under Sherman Act § 2

The Fifth Circuit also dismissed Abraham's Section 2 claims, concluding that the AQHA is incapable of monopolization in the "elite Quarter Horse" market, assuming one exists, because it does not compete in that market.

Abraham argued that the AQHA need not be a competitor in the "elite Quarter Horse" market to have monopolized the market in violation of Section 2. The Fifth Circuit rejected this contention, explaining that the essential attributes of "monopoly power" derive from the monopolists' participation in the relevant market, including possessing a large market share and being able to exclude competitors and extract above-market profits from raised prices. The AQHA did not enjoy market power in the elite Quarter Horse market and was not a competitor in that market. Accordingly, Abraham's Section 2 claims also failed.

Implications

American Quarter Horse has important implications for trade associations, standard-setting organizations, sports leagues, and other self-regulating associations of competitors. First, while the Fifth Circuit did not conclude the AQHA was a single entity, its reasoning casts significant doubt on whether an organization as broad and complex as the AQHA—with a 300-member Board of Directors and a 280,000 strong membership—can make an agreement to support a Section 1 claim. The Fifth Circuit placed significant weight on the fact that the AQHA's decision to exclude cloned horses followed deliberation and voting by the SBRC, followed by a recommendation from SBRC to the Board and subsequent ratification by the Board and general membership. Had the AQHA deviated from these procedures, the Court might have given more credence to the plaintiffs' inference of conspiracy among "influential" SBRC members. It is therefore important that such organizations continue to follow standard operating procedures for all key decisions that could impact competition.

Second, Abraham did not argue that the AQHA agreed to restrain trade in all Quarter Horses. If he had done so, the AQHA's adoption of the no-clones rule might have satisfied the agreement element of Section 1, although Abraham then would have had a difficult time providing that the restraint actually had any anticompetitive effect in that larger market. By alleging a narrower "elite Quarter Horse" market, Abraham was required to prove a conspiracy to restrain trade in that market, which was difficult given the AQHA's organizational structure. The American Quarter Horse case thus demonstrates the importance of alleging a relevant market that is consistent with all parts of a plaintiff's case.

Finally, American Quarter Horse protects trade associations and similar organizations from Section 2 liability when the organization itself is not a participant in the relevant market. The Fifth Circuit distinguished the various other trade association cases cited by Abraham by noting that in those cases the association itself had participated in the market as a separate economic actor and therefore could possess monopoly power. The lesson is, so long as the organization itself does not compete in the relevant market, it should avoid Section 2 liability.

The Fifth Circuit's American Quarter Horse decision of January 14, 2015, is attached.

Thomas D. York, an associate in the Dallas Office, assisted in the preparation of this Alert.

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