Central District Of California Finds Clothing Rental Company’s Antitrust Claims All Style, No Substance
On June 24, 2019, Judge George H. Wu of the United States District Court for the Central District of California granted a defendant clothing rental company’s motion to dismiss antitrust claims brought under California’s Cartwright Act, as well as other state-law claims brought by a competing clothing rental company. FashionPass, Inc. v. Rent the Runway, Inc., No. 19-cv-3537-CG(JCx) (June 24, 2019). Plaintiff alleged that defendant interfered with and intentionally caused certain clothing suppliers to cancel their contracts with, and refuse to supply, plaintiff in violation of the Cartwright Act and California’s Unfair Competition Law (“UCL”). Plaintiff also brought tort claims for intentional interference with contract and intentional interference with prospective economic advantage based on the same alleged conduct. The Court dismissed the complaint in full, finding that plaintiff failed to plead a primary violation of the Cartwright Act, because the complaint did not identify any harm to the market or to competition generally, but instead pleaded only harm to plaintiff itself.
Plaintiff and defendant are both fashion rental companies (“FRCs”) that directly compete in the market for supplying rental clothing and accessories. FRCs purchase merchandise at wholesale prices from manufacturers, advertise the merchandise on their websites, and supply items to customers for rental based on online orders (although some like defendant also operate brick-and-mortar retail locations). The complaint alleged that, in late 2018, a number of clothing manufacturers who previously supplied plaintiff rejected plaintiff’s orders, allegedly because the manufacturers had each entered into exclusive agreements with defendant. The complaint also alleged that plaintiff had valid contracts to purchase merchandise from several other manufacturers, but defendant caused each of these manufacturers to breach their contracts and refuse to sell to plaintiff.
The Court began with an analysis of the principles governing alleged vertical restraints. Under the Cartwright Act, as with the Sherman Act, vertical restraints on trade, such as exclusive dealing arrangements, are not considered per se unlawful and are analyzed under the rule of reason. Thus, the Court rejected plaintiffs’ contention that it had alleged a per se group boycott.
In dismissing plaintiff’s Cartwright Act claim, the Court made two central findings: first, the Court held that, for the purpose of pleading a Cartwright Act violation, plaintiff had plausibly alleged a market defined as the “fashion rental business” in which rental companies like plaintiff and defendant “allow customers to rent clothing and accessories . . . through subscriptions . . .and to then return the items to the Fashion Rental Company, which professionally cleans the items and makes them available for others to rent.” The Court rejected as premature defendant’s argument that this market definition was too narrow, holding that, “without any evidence before the Court, it is impossible for the Court to determine the appropriate market definition” at the pleadings stage. Thus, the Court found that plaintiff met its pleading burden on market definition and market power by alleging a facially plausible market definition and that defendant was the “dominant player” in that market.
Second, the Court found that although plaintiff alleged economic harm to itself, it had failed to allege any harm to competition. The Court therefore dismissed plaintiff’s Cartwright Act claim on this basis. Because plaintiff had not adequately pleaded a Cartwright Act violation, the Court also dismissed claims under California’s UCL as derivative of the antitrust claims. Similarly, because the antitrust claims failed, the Court also dismissed plaintiff’s intentional interference with prospective economic relations claim for failure to plead an “independently wrongful” act of interference. The Court dismissed the intentional interference with contract for failure to adequately plead defendant’s knowledge of the contracts. The Court granted the motion to dismiss without prejudice, allowing plaintiff the opportunity to amend its complaint to attempt to cure these deficiencies.