Fifth Circuit Rejects Jury Verdict Of Quarter Horse Conspiracy, Finding Elite Animal Registries To Be A Horse Of A Different Color

By Seth D. Greenstein

A panel of the U.S. Court of Appeals for the Fifth Circuit has reversed a jury’s verdict that a horse breeding association illegally conspired with some of its members to exclude genetically cloned horses from its elite quarter horse breeding registry, holding the plaintiffs’ circumstantial evidence was insufficient to rebut an inference of independent conduct.

The court in Abraham & Veneklasen Joint Venture v. American Quarter Horse Association also discussed, but declined to decide, whether the American Quarter Horse Association (the “AQHA”) constitutes a single entity incapable of conspiracy, or whether the independent entities comprising the association were capable of engaging in concerted action.

AQHA was organized as a not-for-profit association to register the pedigrees and protect the breeds of American quarter horses. As with other “standard-setting” associations, membership in AQHA and AQHA registration are prerequisites to market participation. AQHA considers proposed changes to registration policies by sending them to a 30-member Stud Book and Registration (“SBR”) standing committee for its recommendation. The general membership then decides whether the committee’s recommendation should be presented to the AQHA Board for final determination.

Although AQHA permits registration of horses conceived through in vitro fertilization, an AQHA rule bars the registration of cloned horses. AQHA’s SBR committee rejected four requests (two from plaintiffs) to change the rule. Plaintiffs sued, alleging a conspiracy among the members of the SBR committee, the SBR committee as a whole, and the AQHA, to restrain competition from cloned horses in violation of Section 1 of the Sherman Act; and monopolization in violation of Sherman Act Section 2.

The appellate court first considered whether, as a matter of law, AQHA was a “single entity” that was not capable of conspiring with its members or committees. In contrast to the independent competitive teams held capable of conspiracy under the aegis of the NFL in the Supreme Court American Needle case, plaintiffs here alleged a narrow “elite quarter horse” product market, which constituted less than half a percent of the overall U.S. market for quarter horses, and in which only a small percentage of AQHA members participated. No other case involving animal breed registry organizations has found antitrust law violations, the court observed. Even though the setting of standards excludes some breeds from the relevant market, the opinion suggests that the essential role of the registry in “creating the product” is relevant to the rule of reason analysis, and should often be immune to antitrust scrutiny. The court further noted the distinction between the structure of the NFL, in which each member had to agree on the exclusive license arrangement at issue in the case, and the structure of AQHA in which the membership decides whether the SBR committee’s recommendation should be put to a vote by AQHA’s board of directors.

The opinion reaches no conclusion on this issue, and, given these “troubling distinctions,” the court declined to resolve how American Needle might apply to breed registry organizations. Instead, assuming that AQHA was legally capable of conspiring with members of its SBR committee, the court held the circumstantial evidence insufficient to support a Section 1 conspiracy claim.

Evidence of the number of elite breeders and their influence on the SBR committee was conflicting. Although the evidence established certain members’ economic interests in conspiring to exclude cloned animals from the registry, no evidence suggested that those few members exerted a disproportionate influence over the greater number of disinterested members.

The court also discounted the “impassioned” comments by an AQHA Executive Committee member—opposing registration of cloned horses and threatening to pull “millions of dollars” out of the industry—to the SBR committee. Absent evidence linking the comments to any actions by the members, such one-sided complaints did not tend to exclude the possibility that the SBR members acted independently, not in concert.

The court also reversed the verdict of monopolization under Section 2 as a matter of law. Even accepting the proposed narrow market definition, and recognizing that AQHA had the power to admit or exclude horses from that market, the court held that AQHA could not be liable for monopolization because it does not compete in that market. AQHA itself does not breed, race, sell, or show elite quarter horses in competition with the plaintiffs.

This case further illustrates the difficulty of proving conspiracies in restraint of trade through circumstantial evidence, where some evidence must tend to support a likelihood of conspiracy and to exclude the possibility of conscious parallelism. Some courts look to expressly defined “plus factors” that view the evidence through the lens of precedents, such as actions contrary to individual economic interest or traditional patterns of conspiracy. Yet these categorizations do not neatly fit the unique standard-setting context. One of the hallmarks of standard setting is the power to leverage the exclusionary authority of the organization without economic sacrifice by individual members. Accordingly, in cases alleging market exclusion through standard-setting, factors such as violations of due process safeguards within the organization or evidence of capture by powerful individual members will likely be more salient indicia of conspiracy.

In this sense, the court’s discussion of the role of a breeding registry in “creating” the product market turns antitrust analysis on its head. To be sure, courts and the U.S. Department of Justice have acknowledged the potential procompetitive benefits of standard setting, and the inherent nature of standard setting to favor or exclude competitors from a market. But the Supreme Court has cautioned that because standard-setting organizations are rife with opportunities to conspire, private standard setting is only permissible if conducted in a nonpartisan manner that safeguards due process against members’ biased economic interests in restraining competition. See Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 U.S. 492 (1988); Am. Soc’y of Mech. Engineers, Inc. v. Hydrolevel Corp., 456 U.S. 556 (1982).

Given the power of standard-setting organizations to distort markets by anointing winners and losers, courts should pay careful attention that these safeguards are rigorously observed. Here, however, the absence of any reference by the court to either of these Supreme Court precedents suggests the evidence did not support either an agreement among competitors or abuse of standard-setting authority that would justify Section 1 liability.

– Edited by Gary J. Malone