Corbett v. NCAA

Case 1:13-cv-00006-YK Document 24 Filed 02/25/13 Page 1 of 30
UNITED STATES DISTRICT COURT MIDDLE DISTRICT OF PENNSYLVANIA COMMONWEALTH OF PENNSYLVANIA, : THOMAS W. CORBETT, JR., GOVERNOR, : : : Plaintiff, : : v. : : : NATIONAL COLLEGIATE ATHLETIC : : ASSOCIATION, : : Defendant. : : : ELECTRONICALLY FILED
Civil Action No.: 1:13- cv00006-YK
(THE HONORABLE YVETTE KANE)
PLAINTIFFS MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANTS MOTION TO DISMISS James D. Schultz, General Counsel Melissa H. Maxman PA Bar #83417 PA Bar # 58009 Jarad W. Handelman, First Executive Ronald F. Wick Deputy General Counsel DC Bar #439737 PA Bar # 82629 (admitted pro hac vice) Governors Office of General Counsel Cozen OConnor Commonwealth of Pennsylvania 1627 I Street, N.W., Suite 1100 th 333 Market Street, 17 Floor Washington, DC 20006 Harrisburg, PA 17101 Tel: (202) 912-4800 Tel: (717) 772-4262 Facsimile: (877) 260-9435 Facsimile: (717) 787-1448 mmaxman@cozen.com jamschultz@pa.gov rwick@cozen.com jhandelman@pa.gov Counsel for Plaintiff Date: February 25, 2013
TABLE OF CONTENTS TABLE OF AUTHORITIES .................................................................................... ii STATEMENT OF FACTS ........................................................................................3 ARGUMENT .............................................................................................................7 1. The PSU sanctions are trade or commerce. ..............................................7 a) The Complaint alleges commercial activity. ............................................8 b) The cases cited by the NCAA are inapposite. ........................................10 2. The PSU sanctions are not procompetitive. ...............................................12 3. The Complaint should not be dismissed for failure to allege anticompetitive effects...............................................................................14 a) The Commonwealth need not allege anticompetitive effects.................14 b) The Commonwealth alleges anticompetitive effects. .............................17 4. The Commonwealth has standing to seek injunctive relief. ......................20 a) Binding precedent establishes the Commonwealths standing. .............20 b) The cases the NCAA cites seek damages and are thus inapposite. ........21 CONCLUSION ........................................................................................................22
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TABLE OF AUTHORITIES Page(s) CASES Adidas Am., Inc. v. NCAA, 40 F. Supp. 2d 1275 (D. Kan. 1999)................................................................... 10 Agnew v. NCAA, 683 F.3d 328 (7th Cir. 2012) ....................................................................9, 16, 20 American Needle, Inc. v. NFL, 130 S. Ct. 2201 (2010) ..................................................................................13, 17 Atl. Richfield Co. v. USA Petroleum Co., 495 U.S. 328 (1990) ............................................................................................ 21 Associated General Contractors, Inc. v. Cal. State Council of Carpenters, 459 U.S. 519 (1983) ............................................................................................ 21 Banks v. NCAA, 977 F.2d 1081 (7th Cir. 1992) ............................................................................ 13 Bassett v. NCAA, 528 F.3d 426 (6th Cir. 2008) .............................................................................. 10 Bowers v. NCAA, 475 F.3d 524 (3d Cir. 2007) ............................................................................... 10 Brader v. Allegheny Gen. Hosp., 64 F.3d 869 (3d Cir. 1995) ................................................................................. 20 Cargill, Inc. v. Monfort of Colo., Inc., 479 U.S. 104 (1986) ............................................................................................ 22 Carleton v. Vermont Dairy Herd Improvement Assn, 782 F. Supp. 926 (D. Vt. 1991) .......................................................................... 12 Commonwealth of Pennsylvania v. Russell Stover Candies, Inc., C.A. No. 93-1972, 1993 U.S. Dist. LEXIS 6024 (E.D. Pa. May 6, 1993) ......... 20 Georgia v. Pennsylvania R. Co., 324 U.S. 439 (1986) ............................................................................................ 20 - ii -
In re K-Dur Antitrust Litig., 686 F.3d 197 (3d Cir. 2012) ............................................................................... 17 Klors, Inc. v. Broadway-Hale Stores, Inc., 359 U.S. 207 (1959) ............................................................................................ 17 McCarthy v. Recordex Servs., 80 F.3d 842 (3d Cir. 1996) ................................................................................. 22 McCormack v. NCAA, 845 F.2d 1338 (5th Cir. 1988) ............................................................................ 13 NCAA v. Board of Regents of the University of Oklahoma, 468 U.S. 85 (1984) ..............................................................................8, 13, 16, 17 Northwest Wholesale Stationers v. Pac. Stationery & Printing Co., 472 U.S. 284 (1985) ..........................................................................11, 12, 15, 16 Pace Electronics, Inc. v. Canon Computer Systems, Inc., 213 F.3d 118 (3d Cir. 2000) ............................................................................... 17 Pocono Invitational Sports Camp, Inc. v. NCAA, 317 F. Supp. 2d 569 (E.D. Pa. 2004) .................................................................. 10 Pretz v. Holstein Friesian Assn, 698 F. Supp. 1531 (D. Kan. 1988) ...................................................................... 12 Queen City Pizza, Inc. v. Dominos Pizza, Inc., 124 F.3d 430 (3d Cir. 1997) ............................................................................... 20 Revell v. Port Auth., 598 F.3d 128 (3d Cir. 2010) ................................................................................. 7 Silicon Economics v. Fin. Accounting Found., No. 11-163, 2011 U.S. Dist. LEXIS 92322 (D. Del. Aug. 17, 2011) .............. 7, 8 Smith v. NCAA, 139 F.3d 180 (3d Cir. 1998) ........................................................................passim Steamfitters Local Union No. 420 Welfare Fund v. Phillip Morris , Inc., 171 F.3d 912 (3d Cir. 1999) ............................................................................... 21
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United States v. Brown Univ., 5 F.3d 658 (3d Cir. 1993) ..................................................................................... 8 West Penn Allegheny Health System, Inc. v. UPMC, 627 F.3d 85 (3d Cir. 2010) ...........................................................................18, 21 OTHER AUTHORITY Herbert Hovenkamp, Antitrust Law, 1911c (1998) .............................................. 16
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The Memorandum of Law filed by the National Collegiate Athletic Association (NCAA) (NCAA Mem.) repeatedly injects factual assertions that flatly contradict the well-pleaded allegations of the Complaint, and are improper to consider at this motion to dismiss stage of the proceedings. Perhaps the most egregious example is the NCAAs assertion on the very first page of its memorandum that Pennsylvania State Universitys (PSU) governing board . . . voted to ratify the Consent Decree between PSU and the NCAA. This is not alleged in the Complaint, and it never occurred. At a minimum, it raises material factual disputes that cannot be resolved on a motion to dismiss. The NCAAs memorandum also contains a great deal of rhetoric regarding both its motives and the economic impact of its actions. These assertions also contradict the Complaint. The specific and well-pleaded allegations of the Complaint are more than sufficient to warrant denial of this motion to dismiss. With respect to the legal sufficiency of the Complaint, the NCAAs principal argument is its extraordinary assertion that its unprecedented sanctions against PSU, including a $60 million fine against one of the nations largest universities, are not commerce. The NCAA wrongly claims that its arbitrary decimation of the PSU football program is no different than its enforcement of rules regulating player eligibility or uniformswhich do enhance collegiate competition although PSU was not found to have violated a single NCAA rule and the NCAAs
own president insisted that the Consent Decree was not an enforcement action. Complaint 57. Neither are these sanctions clearly procompetitive. The NCAA merely used its enforcement authority as a pretext for an anticompetitive attack on PSU, as evidenced by its abdication of its own enforcement processwhich its memorandum never even attempts to defend. The NCAAs argument that the Commonwealth failed to allege anticompetitive effects is similarly meritless. The Commonwealth alleges conduct that constitutes a per se antitrust violation, or at least conduct that can be analyzed under a quick look review. Neither scenario necessitates a showing of a specific anticompetitive effect. Even if the rule of reason were applied, the Commonwealth has pleaded substantial anticompetitive effects in the form of higher prices, reduced output, and diminished quality. Finally, Governor Corbett has standing to enjoin an antitrust violation targeted at the states largest state-related, taxpayer-funded university, with effects on the statewide economy. The NCAA improperly applies a heightened standing analysis that is applicable only to damage actions. More importantly, it ignores that the Pennsylvanians on whose behalf injunctive relief is sought include those who the NCAA admits have standing: customers (PSU students), suppliers
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(prospective student athletes), and an aggrieved competitor (PSU) in the relevant markets. The NCAAs consistent attempt to assert unpleaded factssuch as the non-existent ratification of the Consent Decree by the PSU Board of Trustees displays the same disregard for the Federal Rules of Civil Procedure that the NCAA has shown for its internal rules with respect to PSU. In trying to persuade the Court to endorse a remarkably expansive scope of its power, the NCAAs memorandum appears to have been written more to advance the NCAAs broader agenda, and to combat the recent groundswell of public criticism against the embattled organization, than to raise legal issues appropriate to a motion to dismiss. STATEMENT OF FACTS The roots of this litigation lie not in an NCAA rule violation, or any activity that jeopardized competitive fairness, but rather in the criminal conduct by Gerald Sandusky, a former assistant football coach. Sanduskys crimes, and the response of PSU and certain of its representatives (the Sandusky Offenses), have been well-documented in the press and are the subject of criminal proceedings. Complaint 37-43. The NCAA did not investigate PSUs conduct, but instead relied on a report commissioned by PSU to investigate the Sandusky Offenses (the Freeh Report).
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Complaint 41. While the reaction to the Freeh Report was condemnatory of PSU, the report found no NCAA rule violation. Id. 43, 45. Immediately after the publication of the report, the NCAA informed PSU President Rodney Erickson that if PSU did not waive its rights under the NCAAs Constitution and Bylaws (the Manual) to an investigation, factual findings, a hearing, and other safeguards, and acquiesce to unprecedented sanctions, the NCAA would impose the death penaltythe elimination of PSU football for four years. Complaint 50. The NCAA threatened Erickson that if word of their communications reached the press, the NCAA would impose the death penalty. Id. Faced with no viable alternative, Erickson signed a Consent Decree without seeking approval or ratification from PSUs Board of Trustees. Id. 50-51. The Consent Decree does not identify a single NCAA rule that PSU violated. Complaint 52. Rather, the NCAA relied, and continues to rely, upon a handful of undefined and vague principles in its Manual such as ethical conduct and institutional control. Id. 49, 52. A review of the Manual, as well as the NCAAs enforcement history, demonstrates that these provisions are merely governing principles or preambles. Complaint 49, 52; NCAA Mem. Exh. A. For example, Article 1.2(b), which references the principle of institutional control, appears only as one of the purposes of the [NCAA], not an NCAA rule. -4-
The Consent Decree conceded the critical point that the conduct at issue ordinarily would not be actionable by the NCAA. Complaint 54. NCAA President Mark Emmert acknowledged that the sanctions were unprecedented, even though the public record is replete with reports of NCAA inaction in the wake of criminal conduct by athletesincluding murder and rapethat was covered up or even enabled by university officials, but where the NCAA has taken little or no action. Id. 56-57. Never before had the NCAA injected itself into criminal conduct already being addressed by the justice system, let alone into offenses that did not involve cheating, academic fraud, recruiting violations, or other conduct designed to give athletic programs an unfair competitive advantage. Id. 47. The only aspect of this case that was unique, according to the Consent Decree, was that the conduct was enabled by a culture of reverence for Penn State football. Complaint 54.1 However, as the Complaint alleges, this culture of reverence was not unique to PSU. Complaint 55-59. The NCAA also, for the first time, ignored its own enforcement rules. Complaint 49-50. Pursuant to the Manual, the NCAAs Committee on Infractions is the only entity permitted to administer the enforcement program.
It is ironic that the NCAA attempts to maintain a pious tone throughout its brief, see, e.g., NCAA Mem. 11-13, in light of its recent revelations about its own misconduct while investigating the University of Miami. See http://www.usatoday.com/story/sports/college/2013/02/18/miami-ncaaenforcement-investigation-mark-emmert/1928263/. -5-
Complaint 27. The President, Division I Board of Directors, and Executive Committee are explicitly barred from participating in enforcement proceedings. Id. 28. Accused members are entitled to an evidentiary hearing and an appeal. Id. 29. None of this occurred here. Rather, Emmert, the Division I Board of Directors, and the Executive Committee handled the matter directly, side-stepping the Committee on Infractions and forcing PSU to accept draconian sanctions without any investigation. Complaint 50. Emmert insisted that the punishment was and is action by the Executive Committee exercising their authority. . . . It was completely different than an enforcement process. Id. 57. The Complaint alleges that these departures from rules and precedent demonstrate that the NCAA and its members justification is a pretext for ulterior, anticompetitive motives. Complaint 7, 55, 60. These sanctions threaten harm to competition, PSU, and the Commonwealth.
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ARGUMENT A court confronted with a Rule 12(b)(6) motion must accept the truth of all factual allegations in the complaint and must draw all reasonable inferences in favor of the non-movant. Revell v. Port Auth., 598 F.3d 128, 134 (3d Cir. 2010). The factual allegations in the Complaint, together with reasonable inferences that may be drawn from them, are more than sufficient to withstand the NCAAs motion. 1. The PSU sanctions are trade or commerce.
The NCAAs reliance on Smith v. NCAA, 139 F.3d 180 (3d Cir. 1998), ignores a crucial allegation in the Complaint. Unlike Smith, the Commonwealth is not challenging an NCAA rule or the enforcement of an NCAA rule. Instead, the Commonwealth alleges that the NCAA and its members used the NCAAs rulemaking and enforcement authority as a pretext to launch an anticompetitive attack on PSU. Neither Smith nor any other case even suggests that such a collective assault on a competitor is noncommercial. On a motion to dismiss, the Court should determine whether the challenged conduct is commercial based on the factual allegations in the Complaint. Silicon Economics v. Fin. Accounting Found., No. 11-163, 2011 U.S. Dist. LEXIS 92322, at *20-21 (D. Del. Aug. 17, 2011). Here, the allegations not only distinguish the rulemaking/enforcement cases cited by the NCAA, Complaint 44-50; they also -7-
provide powerful support for the Commonwealths allegation that the NCAAs stated justification for the PSU sanctions, unlike in the Smith cases, was a sham. a) The Complaint alleges commercial activity.
Courts classify a transaction as commercial or noncommercial based on the nature of the conduct in light of the totality of surrounding circumstances. United States v. Brown Univ., 5 F.3d 658, 666 (3d Cir. 1993). With respect to the NCAA, the Supreme Court has articulated the inquiry as whether the challenged restraints fit into the same mold as do rules defining the conditions of the contest, the eligibility of participants, or the manner in which members of a joint enterprise shall share the responsibilities and the benefits of the total venture. NCAA v. Board of Regents of the University of Oklahoma, 468 U.S. 85, 117 (1984). The PSU sanctions, as alleged in the Complaint, do not fit this mold. The distinction between commercial and noncommercial NCAA activity is described in Silicon Economics, 2011 U.S. Dist. LEXIS 92322, at *22. In Silicon Economics, the court acknowledged that [c]ourts have concluded that when the challenged conduct consists of academic rules or player-eligibility requirements, the conduct is non-commercial in nature. 2011 U.S. Dist. LEXIS 92322, at *22 (citing, inter alia, Smith). The court added, however, that when the challenged conduct restrains revenue, output, or salaries, the rules are almost always commercial. Id. at *23. -8-
The PSU sanctions fall well on the commercial side of the line. The Commonwealth alleges that the sanctions are likely to cause a significant decline in the role of PSU football as revenue generator for the university, ultimately hindering PSUs ability to compete for high-quality students, faculty and research programs. Complaint 73. The reduction in football scholarships is an output restriction, and courts have recognized that scholarship limits constitute commercial activity. See, e.g., Agnew v. NCAA, 683 F.3d 328, 341 (7th Cir. 2012) (the transactions [NCAA] schools make with premier athletesfull scholarships in exchange for athletic servicesare commercial in nature). It is laughable to claim that a $60 million fine, coupled with the gutting of one of the most lucrative programs at one of the nations largest universities, is noncommercial activity. Indeed, on February 20, 2013, the NCAA filed a lawsuit in this Court alleging that the Commonwealths law governing the disposition of this noncommercial fine is an unconstitutional regulation of interstate commerce. Complaint, NCAA v. Corbett, Civil Action No. 13-cv-457YK, attached hereto as Exh. A.
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b)
The cases cited by the NCAA are inapposite.
None of the cases cited by the NCAA involved an alleged conspiracy to harm a member institution. Moreover, this allegation is not conclusory. See NCAA Mem. 13 & n.5. The Commonwealth alleges hallmarks of an ulterior, anticompetitive motive, absent from Smith and its progeny: The absence of a violation of any NCAA rule. Any admissions in
the Consent Decree are immaterial, because, as the Complaint alleges, PSU entered into the Consent Decree only because the NCAA left it with no rational economic alternative. Forcing PSU to execute the Consent Decree is the antitrust violation alleged. The absence of any connection between the sanctions and fair
competition in intercollegiate athletics. See Smith, 139 F.3d at 185. The NCAA cites cases involving rules indisputably necessary to prevent conduct creating an unfair competitive advantage and/or compromising the promotion of amateur athletics. See id. at 185 (recruiting rules); Bassett v. NCAA, 528 F.3d 426, 433 (6th Cir. 2008) (recruiting); Bowers v. NCAA, 475 F.3d 524, 535 n.11 (3d Cir. 2007) (academic eligibility); Pocono Invitational Sports Camp, Inc. v. NCAA, 317 F. Supp. 2d 569, 581-84 (E.D. Pa. 2004) (recruiting); Adidas Am., Inc. v. NCAA, 40 F. Supp. 2d 1275, 1286 (D. Kan. 1999) (uniforms). PSU, however, did not improperly recruit players, falsify academic credentials, or otherwise give itself an - 10 -
unfair competitive advantage over other NCAA members. The conduct of which its employees were accused is expressly covered by laws that are being enforced, Complaint 44, and arguably put PSU at a competitive disadvantage. The sanctions thus served no legitimate purpose. The arbitrariness of the NCAAs decision to sanction conduct that
had never been sanctioned outside the context of a specific violation of NCAA rules. In contrast to Smith, the Commonwealth alleged examples of similarly situated NCAA member institutions that, despite evidence of potential high-level cover-ups of egregious crimesincluding murder, rape, and massive academic fraudwere never sanctioned by the NCAA. Complaint 56. The NCAAs total disregard of its own enforcement procedure.
Unlike the Smith line of cases, the Consent Decree openly acknowledged that it was not subject to traditional investigative and administrative proceedings, and the NCAAs president conceded that the PSU sanctions were completely different than an enforcement process. This admission contradicts the NCAAs repeated characterization of the PSU sanctions as simply an enforcement action.2 See NCAA Mem. 10, 13-14.
Notwithstanding the NCAAs misstatement of the holding of Northwest Wholesale Stationers v. Pac. Stationery & Printing Co., 472 U.S. 284 (1985), ignoring internal enforcement procedures is entirely relevant to a rule-of-reason analysis of an associations disciplinary action against a member. See, e.g., - 11 -
If Smith protected the conduct alleged in the Complaint, the NCAA would be free to issue massive fines and participation restrictions at its whim, without antitrust scrutiny, so long as it could tie the penalty to some purportedly dishonest or immoral conduct. This is not the law, and the NCAAs actions against PSU are fully subject to review under the Sherman Act. 2. The PSU sanctions are not procompetitive.
The NCAA wrongly argues that the sanctions are procompetitive. The Complaint alleges precisely the opposite: that the NCAA members recognized that PSU was badly weakened, saw an opportunity to benefit themselves further at PSUs expense, singled out PSU for conduct that had never been punished by the NCAA before, and used vague standards to concoct a post hoc justification for crippling a major competitor. Complaint 44-60. The NCAAs institutional control and ethical standards are not necessary to provide consumers with a distinctive choice that would otherwise not exist in
Carleton v. Vermont Dairy Herd Improvement Assn, 782 F. Supp. 926, 932 (D. Vt. 1991) (process issues . . . may factor into the rule-of-reason analysis); Pretz v. Holstein Friesian Assn, 698 F. Supp. 1531, 1540 (D. Kan. 1988) (absence of fair hearing certainly affects the factfinders determination of defendants motive or intent and the reasonableness of defendants restraints under a rule of reason analysis). Northwest Wholesale Stationers held only that the absence of process was irrelevant to whether the restraint should be treated as a per se violation or evaluated under the rule of reason. 472 U.S. at 293. - 12 -
the marketplace. See NCAA Mem. 13. The NCAA has existed for more than a century without enforcing these standards on a standalone basis. Neither does the NCAAs status as a sports league entitle its actions to deference. Although the Supreme Court has recognized that sports leagues are not trapped by antitrust law with respect to the need to cooperate in the production and scheduling of games, their conduct can still be concerted activity that is subject to 1 analysis. American Needle, Inc. v. NFL, 130 S. Ct. 2201, 2216 (2010) (emphasis added). There is no presumption that any NCAA action is lawful; rather, courts have simply recognized that rules fostering competition among amateur athletic teams are generally procompetitive. Board of Regents, 468 U.S. at 117. The PSU sanctions, however, do not fit this description. There is nothing inherent in staging competition among college sports teams that requires the NCAA to inject itself into pending criminal investigations. At a minimum, the necessity of such interference cannot be ascertained in the twinkling of an eye, as required to dismiss without an evidentiary record. See American Needle, 130 S. Ct. at 2216-17. Unlike this case, the cases cited by the NCAA challenged the undisputedly legitimate application of a specific NCAA rule directly related to facilitating amateur athletic competition, and thus enforced real standards. See Banks v. - 13 -
NCAA, 977 F.2d 1081, 1089-90 (7th Cir. 1992) (eligibility rules); McCormack v. NCAA, 845 F.2d 1338, 1343-45 (5th Cir. 1988) (athlete compensation). Although the NCAA likens those rules to its judgment of PSUs basic morality, NCAA Mem. 15, such a subjective standard is an invitation to the type of anticompetitive abuse that has occurred here. 3. The Complaint should not be dismissed for failure to allege anticompetitive effects.
The NCAAs argument that the Complaint is deficient for failure to allege anticompetitive effects is incorrect for two reasons. First, the Complaint alleges conduct that qualifies as a per se violation of Section 1or at a minimum is subject to quick look reviewin which case a showing of market effects is unnecessary. Second, even under the rule of reason, the Commonwealth adequately alleges anticompetitive effects in the form of increased prices, diminished quality, and reduced output. a) The Commonwealth need not allege anticompetitive effects.
Although the NCAA argues that the rule of reason governs NCAA rules and enforcement actions, NCAA Mem. 14, no NCAA rule is challenged here, and the NCAA has taken great pains to emphasize that the PSU sanctions were not an enforcement action. Complaint 57. The Complaint alleges a naked conspiracy among the NCAA and its members to deprive a competitor of essential
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benefits required to compete effectively, including the ability to compete in postseason play, offer a competitive quantity of football scholarships, and reinvest the revenue from a successful football program. Such conduct amounts to a per se antitrust violationor, at most, warrants a quick look analysisneither of which requires a showing of anticompetitive effects. The NCAAs conduct, as alleged in the Complaint, constitutes a group boycott, which is often listed among the classes of economic activity that merit per se invalidation under 1. Northwest Wholesale Stationers, 472 U.S. at 293. Cases to which [the Supreme Court] has applied the per se approach have generally involved joint efforts by a firm or firms to disadvantage competitors by either directly denying or persuading or coercing suppliers or customers to deny relationships the competitors need in the competitive struggle. Id. at 294. The Commonwealth alleges precisely such a boycott: joint efforts by NCAA members to disadvantage a competitor (PSU) by directly denying it relationships (full participation in the NCAA) it needs to compete. The Supreme Court has recognized other key characteristics common to per se unlawful group boycotts, including (i) the boycott often cut off access to a supply, facility, or market necessary to enable the boycotted firm to compete; (ii) the boycotting firms possessed a dominant position in the relevant market; and (iii) the practices were generally not justified by plausible arguments that they - 15 -
were intended to enhance overall efficiency and make markets more competitive. Id. All three characteristics are alleged here: the sanctions have cut off PSUs access to key NCAA benefits needed to compete, the remaining NCAA members collectively possess a dominant position in all relevant markets, and, as explained above, the sanctions have no procompetitive justification. Under such circumstances the likelihood of anticompetitive effects is clear and the possibility of countervailing procompetitive effects is remote. Id. Quick look or truncated rule of reason analysis is used where the per se framework is inappropriate, but where no elaborate industry analysis is required to demonstrate the anticompetitive character of . . . an agreement, and proof of market power is not required. Agnew v. NCAA, 683 F.3d 328, 336 (7th Cir. 2012) (citing Board of Regents, 468 U.S. at 109). Among other situations, the quick look approach is used when a restraint would normally be considered illegal per se but a certain degree of cooperation is necessary if the [product at issue] is to be preserved. Agnew, 683 F.3d at 336 (citing Board of Regents, 468 U.S. at 117); see also Herbert Hovenkamp, Antitrust Law, 1911c, at 274 (1998). Even if the conduct alleged in the Complaint is not unlawful per se, it requires no more than a quick look. The fact that the NCAA is in the business of staging athletic competition does not preclude application of the per se or quick look rule. The Supreme Court - 16 -
has held the rule of reason applicable to sports leagues only in the context of restraints that indisputably arose out of the members joint interest in the promotion of their product. See American Needle, 130 S. Ct. at 2216 (joint licensing of NFL teams intellectual property); Board of Regents, 468 U.S. at 10001 (restrictions on NCAA members televising of games). The Commonwealth alleges that the PSU sanctions were motivated by no such joint interest, but were imposed with the purpose of injuring a competitor. Because the PSU sanctions are per se unlawful, no showing of anticompetitive effects is necessary. Klors, Inc. v. Broadway-Hale Stores, Inc., 359 U.S. 207, 211 (1959); see also Pace Electronics, Inc. v. Canon Computer Systems, Inc., 213 F.3d 118, 123 (3d Cir. 2000) (requiring showing of anticompetitive effects comes dangerously close to transforming a per se violation into a case to be judged under the rule of reason). At a minimum, under a quick look analysis, the Commonwealth is not required to make a full showing of anticompetitive effects within the market; rather defendant has the burden of demonstrating pro-competitive justifications. In re K-Dur Antitrust Litig., 686 F.3d 197, 209 (3d Cir. 2012). b) The Commonwealth alleges anticompetitive effects.
Even under a rule of reason analysis, the Commonwealth adequately alleges that the PSU sanctions have both actual and threatened anticompetitive effects.
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At the pleading stage, a plaintiff may satisfy the unreasonable-restraint element by alleging that the conspiracy produced anticompetitive effects in the relevant markets. . . . Anticompetitive effects include increased prices, reduced output, and reduced quality. West Penn Allegheny Health System, Inc. v. UPMC, 627 F.3d 85, 100 (3d Cir. 2010). The Commonwealth has alleged all of these effects. The Commonwealth has alleged a direct effect on output in the market for Division I football players: the reduction in scholarships that PSU may offer recruits. Complaint 71. In the rarefied air in which PSU football competes, a marketwide decrease of ten initial scholarships and twenty total scholarships threatens to pose a significant restraint on the ability of the nations top scholastic football players to obtain scholarships at the Division I championship level. Moreover, the Commonwealth has alleged reduced quality. In West Penn, when reversing the denial of a motion to dismiss, the Third Circuit held that the plaintiff met its burden by alleging that by denying West Penn capital, the conspiracy caused West Penn to cut back on its services (including specialized hospital services) and to abandon projects to expand and improve its services and facilities. 627 F.3d at 101. Similarly, the Commonwealth alleges that by denying PSU revenue, as well as imposing a $60 million fine, the NCAA is likely to force PSU to reduce the availability and/or quality of some of its programs, which
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ultimately can be expected to harm the universitys ability to compete for highquality faculty and research programs. Complaint 73. The Complaint further alleges PSUs significance in the relevant markets, as one of the largest universities in the nation, a longtime football powerhouse, and, according to one survey of employers, the number one college in the nation for preparing students for employment. Complaint 70. The Complaint alleges a likelihood that PSU will be forced to raise prices, i.e., tuition, which not only would affect a substantial portion of the market by itself, but also would remove a significant restraint on the tuition charged by colleges and universities that regard themselves among PSUs nearest competitors. Id. 73. Similarly, the reduction in quality that is likely to result from the limitation on PSUs ability to invest in its programs and facilities could easily impact the incentives of PSUs nearest rivals to invest. See id. If PSU is unable to upgrade a research laboratory or build a new natatorium for its swim team, its inability will remove a key incentive for competitors to do the same. The Commonwealth alleges that the PSU sanctions are likely, if not certain, to adversely affect price, quality, and output in the relevant markets. Although the NCAA may challenge the precise definition and likelihood of the effects, these are
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issues appropriate for factual development, and not for dismissal at this early stage.3 4. The Commonwealth has standing to seek injunctive relief. a) Binding precedent establishes the Commonwealths standing.
[T]he existence of an antitrust injury is not typically resolved through motions to dismiss. Brader v. Allegheny Gen. Hosp., 64 F.3d 869, 876 (3d Cir. 1995). Here, the Commonwealth has more than met its burden of alleging antitrust injury appropriate for injunctive relief. The Commonwealths standing to seek injunctive relief is well established. In Georgia v. Pennsylvania R. Co., 324 U.S. 439 (1945), the Supreme Court held that a state may bring a parens patriae action for injunctive relief to address harm to a states economy arising out of a conspiracy in violation of the antitrust laws. Id. at 447; see also Commonwealth of Pennsylvania v. Russell Stover Candies, Inc., C.A. No. 93-1972, 1993 U.S. Dist. LEXIS 6024, at *22 (E.D. Pa. May 6, 1993) (a state may still seek injunctive relief for harm to its general economy that is caused The NCAAs suggestion that the Commonwealth has not defined the relevant markets by reference to reasonable consumer substitutability is incorrect. See NCAA Mem. 18 n.7. Neither of the cases the NCAA cites holds that a complaint must identify the precise contours or members of each alleged market. In Queen City Pizza, Inc. v. Dominos Pizza, Inc., 124 F.3d 430 (3d Cir. 1997), the relevant market was defined as a single pizza chain, and the complaint failed to account for the existence of obvious substitutes. In Agnew v. NCAA, 683 F.3d 328 (7th Cir. 2012), no relevant market was alleged. Neither deficiency is present here. - 20 3
by a violation of federal antitrust law). The Complaint alleges, in detail, that the PSU sanctions threaten precisely such harm to the Pennsylvania economy. Complaint 75. The NCAAs assertion that the Commonwealth is not representing consumers or competitors in the alleged markets is incorrect. At a minimum, Pennsylvania citizens include students and parents who are consumers in the market for postsecondary education, who face a likely tuition increase, Complaint 73, and a diminution in the value of the PSU educational and community experience as a direct result of the PSU sanctions. Id. 75. They include student football players who will face a constrained market for their talents as a direct result of the reduction in scholarships. Id. 73. And they include PSU, which is an injured competitor in all three of the alleged markets. Id. b) The cases the NCAA cites seek damages and are thus inapposite.
The requirements for establishing standing under the antitrust laws are less rigorous where, as here, only injunctive relief is sought, than in the damages cases cited by the NCAA. See, e.g., Atl. Richfield Co. v. USA Petroleum Co., 495 U.S. 328, 331 (1990) (seeking damages); Associated General Contractors, Inc. v. Cal. State Council of Carpenters, 459 U.S. 519, 529 (1983) (same); West Penn, 627 F.3d at 96 (same); Steamfitters Local Union No. 420 Welfare Fund v. Phillip
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Morris, Inc., 171 F.3d 912, 918 (3d Cir. 1999) (same). Section 16 has been applied more expansively than standing analysis for damage actions, both because its language is less restrictive . . . and because the injunctive remedy is a more flexible and adaptable tool for enforcing the antitrust laws than the damage remedy. McCarthy v. Recordex Servs., 80 F.3d 842, 856 (3d Cir. 1996) (internal quotations omitted). Also, because injunctive relief raises no threat of duplicative recoveries against the same defendant for the same conduct, such factors as the remoteness of the plaintiff and the indirect nature of the injury are not relevant under 16. Id., citing Cargill, Inc. v. Monfort of Colo., Inc., 479 U.S. 104, 111 n.6 (1986). The NCAAs argument that the Complaint threatens to radically expand the scope of future antitrust plaintiffs has it backwards. What is radical is the NCAAs argument that the governor of a state lacks standing to seek to enjoin an antitrust violation aimed at one of its universities, with direct adverse effects on untold numbers of consumers and other citizens of the state. Such a decision would be unprecedented, inappropriate, and inconsistent with the antitrust laws. CONCLUSION The NCAA asks this Court to disregard the Commonwealths allegations that the PSU sanctions were nothing more than an anticompetitive attack on PSU, using the NCAAs enforcement authority as a pretext. The NCAAs request is - 22 -
based on self-serving assurances that its only concern was protecting its organization and enforcing basic values. No Rule 12(b)(6) movant is entitled to such leaps of faith. DATED: February 25, 2013 Respectfully submitted,
/s/ James D. Schultz James D. Schultz, General Counsel PA Bar #83417 Jarad W. Handelman, First Executive Deputy General Counsel PA Bar # 82629 Governors Office of General Counsel Commonwealth of Pennsylvania 333 Market Street, 17th Floor Harrisburg, PA 17101 Tel: (717) 772-4262 Facsimile: (717) 787-1448 jamschultz@pa.gov jhandelman@pa.gov /s/ Melissa H. Maxman Melissa H. Maxman PA Bar # 58009 Ronald F. Wick DC Bar #439737 (admitted pro hac vice) Cozen OConnor 1627 I Street, N.W., Suite 1100 Washington, DC 20006 Tel: (202) 912-4800 Facsimile: (877) 260-9435 mmaxman@cozen.com rwick@cozen.com Counsel for Plaintiff - 23 -
CERTIFICATE OF LOCAL RULE 7.8(b)(2) COMPLIANCE I hereby certify that this brief complies with the type-volume limitation set forth in Local Rule 7.8(b)(2). This brief contains 4,956 words.
DATED: February 25, 2013
/s/ Melissa H. Maxman Melissa H. Maxman PA Bar # 58009 Cozen OConnor 1627 I Street, N.W., Suite 1100 Washington, DC 20006 Tel: (202) 912-4800 Facsimile: (877) 260-9435 mmaxman@cozen.com Counsel for Plaintiff
CERTIFICATE OF SERVICE I hereby certify that a true and correct copy of the foregoing Plaintiffs Opposition to Defendants Motion to Dismiss was served via the ECF Service this 25th day of February, 2013, on each of the following: Attorneys for Defendant: The National Collegiate Athletic Association Thomas W. Scott KILLIAN & GEPHART, LLP 218 Pine Street P.O. Box 886 Harrisburg, PA 17108-0886 Telephone: (717) 232-1851 Facsimile: (717) 238-0592 tscott@killiangephart.com Gregory L. Curtner Kimberly K. Kefalas SCHIFF HARDIN LLP 350 South Main Street, Suite 210 Ann Arbor, MI 48104 Telephone: (734) 222-1500 Facsimile: (734) 222-1501 gcurtner@schiffhardin.com
Everett C. Johnson, Jr. J. Scott Ballenger Roman Martinez LATHAM & WATKINS, LLP 555 Eleventh Street, NW, Suite 1000 Washington, DC 20004-1304 Telephone: (202) 637-2200 Facsimile: (202) 637-2201 everett.johnson@lw.com scott.ballenger@lw.com /s/ Melissa H. Maxman Melissa H. Maxman
Case 1:13-cv-00006-YK Document 24-1 Filed 02/25/13 Page 1 of 21

Page 1
SILICON ECONOMICS. INC., Plaintiff, v. FINANCIAL ACCOUNTING FOUNDATION, and FINANCIAL ACCOUNTING STANDARDS BOARD, Defendants. CIVIL ACTION NO. 11-163 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE 2011 U.S. Dist. LEXIS 92322
August 17, 2011, Decided August 18, 2011, Filed PRIOR HISTORY: Silicon Econ., Inc. v. Fin. Accounting Found. & Fin. Accounting Stds. Bd., 2010 U.S. Dist. LEXIS 130989 (N.D. Cal., Nov. 24, 2010) CORE TERMS: invention, accounting, ownership interest, website, factual allegations, commerce, antitrust law, declaratory relief, challenged conduct, injury-in-fact, patent, reputation, antitrust, concrete, antitrust claims, oral argument, license, law claims, supplemental jurisdiction, facial attack, anti-competitive, non-profit, settlement, imminent, goodwill, cloud, Sherman Act, leave to amend, legal rights, royalty-free COUNSEL: [*1] For Silicon Economics Inc., a California Corporation, Plaintiff: Sean T. O'Kelly, LEAD ATTORNEY, O'Kelly & Ernst, LLC, Wilmington, DE; Perry J. Narancic, PRO HAC VICE. For Financial Accounting Foundation, Defendant: Richard L. Horwitz, LEAD ATTORNEY, Jonathan A. Choa, Potter Anderson & Corroon, LLP, Wilmington, DE; Garrard R. Beeney, Gary A. Greene, Yvonne S. Quinn, PRO HAC VICE. For Financial Accounting Standards Board, Defendant: Richard L. Horwitz, LEAD ATTORNEY, Jonathan A. Choa, Potter Anderson & Corroon, LLP, Wilmington, DE. JUDGES: Michael M. Baylson, United States District Judge. OPINION BY: Michael M. Baylson OPINION MEMORANDUM ON MOTION TO DISMISS Baylson, J. Silicon Economics, Inc. ("SEI") filed this action seeking damages and clarification of its ownership interest in its invention, "EarningsPower Accounting." which is the subject of U.S. Patent 7,620,573 (the "Invention"). SEI claims that the Financial Accounting Foundation ("FAF") and the Financial Accounting Standards Board ("FASB." collectively with FAF, "Defendants"), have unlawfully claimed a royalty-free license in the Invention and refuse to release any ownership interest in the Invention. SEI claims violations of federal antitrust law and California's [*2] Unfair Competition Law. SEI also seeks declaratory relief under California law. Defendants have moved to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(1) for lack of standing and under Rule 12(b)(6) for insufficient pleading of each claim. (Mot. to Dismiss, ECF No. 18.) After careful consideration of Defendants' Motion and the parties' briefing and oral argument on August 11. 2011, the Court will grant Defendants' Motion, allowing SEI leave to amend the Complaint. I. Factual and Procedural History According to the Complaint in this matter, FASB is "the principal organization in the private sector for establishing standards of financial accounting which govern the preparation of financial statements by public companies in the United States." (Compl., ECF No. 1 9.) FAF is a private, non-governmental. non-profit foundation that governs FASB. (Id. 4.) SEI alleges that FASB "has at least 90% of the market for establishing and decreeing financial accounting standards in the United States," and the remainder of the

Page 2 2011 U.S. Dist. LEXIS 92322, *
market consists of individuals, academics, government bodies, corporations, and accounting firms that articulate accounting standards, as well as the International Accounting [*3] Standards Board. (Id. 10.) SEI is one of these other participants and is attempting to establish more effective accounting standards in direct competition with FASB. (Id. 13.) To that end. SEI developed the Invention, an equation that "improv[es] the accuracy of net income measurement and embraces mark-to-market accounting of asset and liability values [to] yield[] accurate and current balance sheets." (Id. 19.) SEI contends the Invention resolves the fundamental accounting problem, i.e. either the balance sheet or the income sheet can be accurate and useful, but not both. (Id. 14. 19.) Pertinent to this litigation, on July 6. 2006. FASB requested public comments "concerning the most basic objects for financial reporting and how to accomplish such objects." (Id. 20.) FASB's invitation also staled that "all comments received by the FASB are considered public information. Those comments will be posted to the FASB's website and will be included in the project's public record." (Id. 21.) SEI provided comments, including briefing on the Invention. (Id. 22.) SEI then participated in a roundtable discussion and SEI's founder, Joel Jameson ("Jameson"), privately met with the FASB [*4] regarding the Invention. (Id.) Several months later. Jameson became aware of certain terms and conditions on FASB's website, namely: "Any information or material you transmit . . . by . . . sending an e-mail . . . including information such as personal data, comments and suggestions (whether in response to a specific query or otherwise) will be treated as non-confidential and non-proprietary . . . . Unless we agree in writing in advance, anything you transmit, whether electronically or in hard copy may be used by the FAF/FASB and its affiliates for any purpose. including. but not limited to. reproduction. disclosure, transmission, publication, broadcast and posting. This means that the FAF/FASB may use the ideas, concepts, know-how or techniques you transmit . . . ."
two years. Jameson again contacted FASB through legal counsel. (Id. 25.) In response, FASB "claimed that it ha[s] a royally-free ownership interest in the [*5] SEI Invention . . . and categorically refused to release any such interest." (Id.) After another few months passed, SEI filed suit in California federal court, but the complaint was dismissed for lack of personal jurisdiction over Defendants. (Id. 26); see Silicon Econ., Inc. v. Fin. Accounting Found., No. 10-1939, 2010 U.S. Dist. LEXIS 130989, 2010 WL 4942468, at *7 (N.D. Cal. Nov. 24, 2010). During the course of that litigation, however, counsel for Defendants expressly disavowed a license to practice the Invention or any claim or ownership interest therein, and affirmed Defendants have no intention of claiming any ownership interest. (Compl. 27.) "Despite these admissions. [Defendants have] refused to release [their] purported ownership claims in the [Invention]." (Id.) Still seeking clarity, SEI filed the instant Complaint asserting claims for restraint of trade and monopolization in violation of the Sherman Act, 15 U.S.C. 1, 2; a claim for declaratory relief under California law; and a claim for unfair competition under California law. (Compl. 28-44.) On April 29, 2011, Defendants filed the instant Motion to Dismiss Plaintiff's Complaint With Prejudice for lack of jurisdiction and for failure to state [*6] a claim upon which relief can be granted. SEI also filed a Motion for a Preliminary Injunction (Mot., ECF No. 6). but agreed the Court should first rule on Defendants' Motion to Dismiss (Order. ECF No. 16). II. Jurisdiction and Standard of Review A. Jurisdiction The Court has jurisdiction over SEI's antitrust claims pursuant to 28 U.S.C. 1331 and 1337, and supplemental jurisdiction over its California law claims under 28 U.S.C. 1367(a). SEI contends venue is proper pursuant to 15 U.S.C. 22. Defendants have not objected to venue in this District. B. Standard of Review A Rule 12(b)(1) motion to dismiss for lack of subject matter jurisdiction presents either a facial attack or a factual attack. CNA v. United States, 535 F.3d 132, 139 (3d Cir. 2008); see Fed. R. Civ. P. 12(b)(1). A facial attack concerns an alleged pleading deficiency, whereas a factual attack concerns the actual failure of a plaintiff's claim to comport factually with the jurisdictional prerequisites. CNA, 535 F.3d at 139. On a facial attack, the Court must consider the allegations of the complaint as true. Mortensen v. First Fed. Sav. & Loan Ass'n, 549 F.2d 884, 891 (3d Cir. 1977). In
(Id. 23) (the "Website Terms"). Unaware of the Website Terms prior to submitting his comments in July 2006. Jameson contacted FASB to clarify and confirm FASB did not claim any ownership interest in the Invention. (Id. 24.) After receiving no response for more than

contrast, there are three important [*7] consequences of a factual attack: (1) there is no presumption of truthfulness; (2) the plaintiff bears the burden of proving subject matter jurisdiction: and (3) the Court has authority to make factual findings on the issue, and can look beyond the pleadings to do so. CNA, 535 F.3d at 145. Defendants appear to be making a facial attack against SEI's complaint. In their Opening Brief, Defendants assume the veracity of SEI's allegations and challenge the sufficiency of those allegations. (Opening Br., ECF No. 19 at 7-9); see also Danvers Motor Co. v. Ford Motor Co., 432 F.3d 286. 292 (3d Cir. 2005) (evaluating sufficiency of plaintiff's factual allegations in complaint on standing challenge). As for Defendants' Motion pursuant to Rule 12(b)(6), the court must accept as true all well-pleaded factual allegations and must construe them in the light most favorable to the non-moving party. Phillips v. County of Allegheny, 515 F.3d 224, 228 (3d Cir. 2008). According to the Third Circuit, Twombly v. Bell Atlantic Corp., 550 U.S. 544, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007). and Ashcroft v. Iqbal, 556 U.S. 662, 129 S. Ct. 1937, 173 L. Ed. 2d 868 (2009), establish a three-pronged approach for evaluating the sufficiency of pleadings in all civil actions: first, [*8] the court must identify the elements the plaintiff must plead to state a claim; second, the court asks whether the complaint sets forth factual allegations or conclusory statements; third, if the complaint sets forth factual allegations, the court must assume their veracity and draw reasonable inferences in favor of the non-moving party, but then must determine whether the factual allegations plausibly give rise to an entitlement to relief. See Santiago v. Warminster Twp., 629 F.3d 121, 130 & n.7 (3d Cir. 2010); see Iqbal 129 S. Ct. at 1950, 1953. For the second step, the court should separate the factual and legal elements of the claims, must accept the well-pleaded facts as true, and may disregard any legal conclusions. Fowler v. UPMC Shadyside, 578 F.3d 203, 210-11 (3d Cir. 2009). The plaintiff's complaint must contain a short and plain statement of the claim showing that the pleader is entitled to relief. W. Penn Allegheny Health Sys. v. UPMC, 627 F.3d 85, 98 (3d Cir. 2010). The complaint must state factual allegations that, taken as a whole, render the plaintiff's entitlement to relief plausible. Id. This does not impose a probability requirement, but instead calls for enough facts [*9] to raise a reasonable expectation that discovery will reveal evidence of the necessary elements. Id. A claim has facial plausibility when the plaintiff pleads factual content that allows the court to reasonably infer that the defendant is liable for the misconduct alleged. Gelman v. State Farm Mut. Auto. Ins. Co., 583 F.3d 187. 190 (3d Cir. 2009).
"[J]udging the sufficiency of a pleading is a context-dependent exercise. Some claims require more factual explication than others to state a plausible claim for relief." UPMC, 627 F.3d at 98 (reversing district court's application of heightened scrutiny in antitrust context) (citation omitted). Accordingly, the Court considers the factual allegations in SEI's complaint as true for all purposes of Defendants' Motion. III. Discussion Defendants argue the Court should dismiss SEI's Complaint because SEI lacks standing under Article III and has failed to sufficiently plead its claims for relief. Defendants also argue the Court should decline to exercise supplemental jurisdiction over SEI's state law claims if the Court dismisses SEI's federal claims. A. Standing Defendants contend that SEI has failed to establish an actual case or controversy exists [*10] in this matter because it cannot satisfy the "injury-in-fact" and "fairly traceable" elements of constitutional standing. As such, they argue the Court lacks jurisdiction over this case. SEI opposes Defendants' Motion and argues its claims are justiciable because Defendants' refusal to release its claimed ownership interest in SEI's patent has created uncertainty regarding SEI's ownership interest. In reply, Defendants contend any alleged harm is only theoretical because they have not made any use of the Invention and that SEI has failed to sufficiently allege any harm. The Court agrees with Defendants. In its Opposition, SEI conflates Defendants' Article III and California declaratory relief arguments, but California law regarding declaratory relief is inapposite to the question of Article III standing. Article III of the Constitution limits the exercise of federal judicial power to adjudication of actual cases or controversies. Toll Bros., Inc. v. Twp. of Readington, 555 F.3d 131, 137 (3d Cir. 2009). This limitation is enforced through several justiciability doctrines, including, standing, mootness. ripeness, the political-question doctrine, and the prohibition on advisory opinions. [*11] Id. Perhaps the most important of these doctrines is standing. Id. The "irreducible constitutional minimum" of Article III standing consists of three elements: (1) the plaintiff must have suffered a concrete, particularized injury-in-fact, which must be actual or imminent, not conjectural or hypothetical; (2) the injury must be fairly traceable to the challenged action of the defendant, and not the result of independent action of some third party not before the Court: and (3) the plaintiff must also establish that a favorable decision would likely redress the

alleged injury. Id. at 137-38. Defendants argue SEI has failed to establish the first two elements. SEI, as the party invoking federal jurisdiction, bears the burden of establishing these elements. See Lujan v. Defenders of Wildlife, 504 U.S. 555, 561, 112 S. Ct. 2130, 119 L. Ed. 2d 351 (1992). Each element must be supported in the same way as any other matter on which SEI bears the burden of proof, i.e. "with the manner and degree of evidence required at the successive stages of the litigation." Id. On a motion to dismiss, allegations may suffice because they are assumed true. Id. Thus, to state an injury-in-fact sufficient to survive a motion to dismiss, SEI must [*12] sufficiently plead that it has suffered some concrete harm because of Defendants' conduct. See N.J. Physicians, Inc. v. President of the United States, 653 F.3d 234, No. 10-4600, 2011 U.S. App. LEXIS 15899, 2011 WL 3366340, at *3 (3d Cir. Aug. 3, 2011) (noting "standing cannot be inferred argumentatively from averments in the pleadings bu rather must affirmatively appear in the record") (quotations omitted). To satisfy the injury-in-fact element, the plaintiff must have suffered a palpable and distinct harm that affects the plaintiff in a personal and individual way. 2011 U.S. App. LEXIS 15899, [WL] at *3; Toll Bros., 555 F.3d at 138. In an action for declaratory relief, the plaintiff need not suffer the full harm expected, so long as there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant issuance of a declaratory judgment. Khodara Envtl., Inc. v. Blakey, 376 F.3d 187, 193-94 (3d Cir. 2004); St. Thomas-St. John Hotel & Tourism Ass'n v. Virgin Islands, 218 F.3d 232, 240 (3d Cir. 2000). The injury must be concrete and particularized, and actual or imminent. Lujan, 504 U.S. at 564 n.2; N.J. Physicians, 2011 U.S. App. LEXIS 15899, 2011 WL 3366340, at *3 (stating plaintiff must sufficiently allege [*13] both elements to establish standing). Intentions, without concrete plans, do not support a finding of actual or imminent injury. Lujan, 504 U.S. at 564 n.2 If there is no actual injury, the injury must be at least imminent. Id. Although an elastic concept, it cannot be stretched beyond its purpose which is to ensure the alleged injury is not too speculative but is "certainly impending." Id. Allegations of injury are insufficient when the plaintiff alleges injury at some future time and the acts necessary to make the injury happen are at least partly within the plaintiff's control. Id. Nonetheless, "[i]njury-in-fact is not Mount Everest." Danvers, 432 F.3d at 294. The contours of the requirement, though not precisely defined, are very generous, requiring only allegations of some specific, identifiable trifle of injury. Id. (citing Bowman v. Wilson, 672 F.2d 1145, 1151 (3d Cir. 1982)).
In its Complaint. SEI alleges Defendants have created uncertainty regarding SEI's exclusive rights in the Invention, which has harmed SEI's reputation and goodwill. (Compl. 32.) SEI raises two other alleged injuries in its Opposition - SEI's dispute with Defendants has impeded its ability to seek financing [*14] and has had "substantial and immediate impact on the business of SEI" - but "[i]t is axiomatic that the complaint may not be amended by the briefs in opposition to a motion to dismiss." (Opp'n at 5, 7); see Pennsylvania ex rel. Zimmerman v. Pepsico, Inc., 836 F.2d 173, 181 (3d Cir. 1988) (quotations omitted). Injury to reputation, including commercial reputation, may constitute a cognizable injury-in-fact for Article III standing. See Foretich v. United States, 351 F.3d 1198, 1211, 359 U.S. App. D.C. 54 (D.C. Cir. 2003) (citing Meese v. Keene, 481 U.S. 465, 473-77, 107 S. Ct. 1862, 95 L. Ed. 2d 415 (1987)); GTE Sylvania Inc. v. Consumer Prod. Safety Comm'n, 404 F. Supp. 352. 366 (D. Del. 1975). As for the alleged "uncertainty," the Court finds a decision from the Eastern District of Virginia instructive on the issue. In Robishaw Engineering, Inc. v. United States, a patent-holder, who was negotiating a license agreement with the United States Army, filed suit against the United States claiming that the Army's assertion of a royalty-free license put a cloud on the patent and diminished its market value. 891 F. Supp. 1134, 1137 (E.D. Va. 1995). Judge Ellis acknowledged that patents represent legal rights, namely the right to exclude parties other [*15] than the government. Id. at 1149. He also recognized the "simple truism that the value of any legal right depends on the likelihood of successfully enforcing it." Id. Thus, any cloud or uncertainty regarding enforceability diminishes the property's market value, and any party who seeks a judicial declaration to eliminate that uncertainty can point to the diminution in value as an injury-in-fact. Id. But if that uncertainty is always deemed sufficient, standing would become a meaningless requirement. Id. To exclude the possibility of rendering standing meaningless, Judge Ellis determined that standing requires the cloud or uncertainty to consist of a sufficiently immediate, definite, and concrete threat to the legal right at issue. Id. Thus, the question is whether the defendant has taken definite and concrete steps to assert a claim or has at least threatened to assert a claim adverse to the plaintiff's interests. Id. at 1150. In Robishaw, the Army took no firm position, only suggesting that it may have a royalty-free license. Id. Therefore, Judge Ellis concluded the plaintiff had failed to sufficiently allege an injury-in-fact based on a cloud on its patent. Id. SEI has similarly failed [*16] to sufficiently allege an injury in fact.

As for the alleged harm to reputation and goodwill, SEI offers only bald assertions of injury. SEI has not offered any factual allegations on which it bases its contention it has suffered harm to reputation or goodwill. Failing to meet its burden of alleging standing at this stage of the litigation, the Court will dismiss SEI's Complaint without prejudice to SEI amending its Complaint.1 1 The cases SEI relies on do not persuade the Court otherwise. In Leonard Carder, LLP v. Patten, Faith & Sandford, the California Court of Appeals found an actual controversy justifying jurisdiction over the claim for state-law declaratory relief. 189 Cal. App. 4th 92, 116 Cal. Rptr. 3d 652, 653 (Cal. Ct. App. 2010). Two law firms were disputing the allocation of legal fees from settlement of a class action. Id. at 654. The money was held in trust and the defendant claimed it was owed forty percent based on a prior agreement. Id. The plaintiff disputed the existence of the agreement and sent a check for the significantly lower lodestar amount, with a note that the payment was in "final settlement." Id. Before cashing the check, the defendant amended the memo line to reflect the payment [*17] was "credit toward final settlement." Id. Unlike in this case, each party had taken a firm position on the amount due the defendant, which created an ongoing controversy warranting declaratory relief. See id. at 656-57. In Principal Life Insurance Co. v. Robinson, the Ninth Circuit concluded an actual dispute existed regarding the calculation of rent under a lease agreement. 394 F.3d 665, 668 (9th Cir. 2005). The plaintiff had previously attempted to sell its interest in the lease. but the dispute regarding the rent calculation undermined the deal. Id. The Ninth Circuit found this past difficulty suggested the plaintiff would continue to have difficulty, which warranted declaratory relief. Id. at 672. SEI, however, has not alleged any such past difficulties or experiences with the Invention, making only conclusory assertions that its title is uncertain and that is has suffered harm to reputation and goodwill. Without more facts, SEI's circumstances are distinguishable from those in Leonard Carder and Principal Life. B. Antitrust Claims Defendants offer two arguments in favor of dismissal of SEI's antitrust claims. First. they contend they are not engaged in trade or commerce and, therefore, [*18] the Sherman Act does not apply to them. Defendants also argue SEI has failed to sufficiently plead a relevant
product market because no market exists; it has not sufficiently pled an antitrust injury because Defendants and SEI do not compete; Defendants maintain a monopoly through the Securities and Exchange Commission ("SEC") not any anti-competitive conduct in violation of 2: and Defendants have engaged in unilateral conduct, not any combination in violation of 1. In response, SEI focuses on establishing that Defendants' non-profit status is not dispositive of the trade or commerce issue. Further. SEI contends there is commerce involved because Defendants allegedly misappropriated SEI's patent and SEI is a commercial entity. As for the substance of the claims, SEI argues it sufficiently pled antitrust injuries of reduced innovation and excluded competition. As for the relevant market. SEI argues the Court must also consider potential markets, and SEI could potentially compete with Defendants. For its 2 claim, SEI contends Defendants are unlawfully maintaining their monopoly by taking SEI's property, and for the 1 claim. SEI argues the Websitc Terms may form an agreement in [*19] restraint of trade and both parties to an agreement need not share anti-competitive intent. In reply, Defendants argue they are not engaged in trade or commerce because their accounting standards are freely available to anyone in the world and are available without charge and without payment to Defendants, save for sales of bounded volumes and unrelated licensing arrangements. They further contend that the challenged conduct, i.e. adoption of and adherence to the Website Terms, is not motivated by commercial objectives or advantages despite receipt of government funds. In addition, Defendants argue they are not participants in the commercial market for accounting standards and SEI only alleges injuries to itself rather than to competition. Further, Defendants maintain they did not engage in concerted action, but unilaterally adopted the Website Terms. 1. "Trade or Commerce" The purpose of antitrust law is to regulate commerce, which entails determining the applicability of antitrust laws by considering the nature of the activity being challenged, not the nature of the organization engaged in the activity. 1B Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law 260, at 158, 161 (3d ed. [*20] 2006); see Apex Hosiery Co. v. Leader, 310 U.S. 469, 493 n.15, 495, 60 S. Ct. 982, 84 L. Ed. 1311 (1940); see also United States v. Brown Univ., 5 F.3d 658, 665 (3d Cir. 1993) (finding antitrust laws apply to non-profit organizations engaged in commerce). Thus, the threshold issue is whether the antitrust laws even apply to the challenged conduct. Brown Univ., 5 F.3d at 665.

It is axiomatic that antitrust laws regulate only transactions that are commercial in nature. Id. Courts classify a transaction as commercial in nature based on the nature of the challenged conduct in light of the totality of the surrounding circumstances. Id. at 666; see Areeda & Hovenkamp, supra 262a. at 177 (endorsing objective test which asks whether antitrust defendants are likely to receive direct economic benefit as a result of any reduction in competition in market in which target firms operate). An effect on prices is not essential. Klor's, Inc. v. Broadway-Hale Stores, Inc., 359 U.S. 207, 213 n.7, 79 S. Ct. 705, 3 L. Ed. 2d 741 (1959). The Third Circuit's approach does not encompass restraints that result in incidental economic effects. See Pocono Invitational Sports Camp, Inc. v. NCAA, 317 F. Supp. 2d 569. 584 (E.D. Pa. 2004) (Brody, J.). On a motion to dismiss, [*21] the Court should determine whether the challenged conduct is commercial based on the factual allegations in the complaint. See Hamilton Chapter of Alpha Delta Phi. Inc. v. Hamilton Coll., 128 F.3d 59, 66 (2d Cir. 1997). In this case. SEI is challenging Defendants' adoption of and adherence to the Website Terms, particularly the reservation of rights to use any submitted ideas for any purpose, and subsequent refusal to release any ownership interest. (Compl. 20, 27.)2 SEI alleges that Defendants have unlawfully claimed a proprietary interest for the purpose of excluding SEI as a competitor in the market for establishing accounting standards in the United States. (Id. 37.) SEI contends Defendants' conduct lessens competition, discourages public comment, discourages innovation, and entrenches Defendants' monopoly. (Id. 38, 40.) 2 As noted below, Defendants' counsel's unconditional recantation of an ownership interest at oral argument must be given some weight in assessing Plaintiff's allegations, which will presumably be clarified in an amended complaint. It is important at the outset to define the apparent scope of SEI's antitrust claims against Defendants. SEI is not challenging [*22] FASB's conduct in setting standards, which is a more common subject of antitrust review. Instead, SEI is challenging Defendants' Website Terms which apply to voluntary submissions of solicited comments. Federal courts have experience with the "trade or commerce" issue, particularly in the context of the NCAA's regulation of student athletics. Courts have concluded that when the challenged conduct consists of academic rules or player-eligibility requirements, the conduct is non-commercial in nature. E.g., Smith v. NCAA, 139 F.3d 180, 185-86 (3d Cir. 1998) (holding Sherman Act does not apply to NCAA rules and eligibility requirements that primarily seek to ensure fair competition
in collegiate sports, not to provide the NCAA with a commercial advantage), rev'd on other grounds, NCAA v. Smith, 525 U.S. 459, 119 S. Ct. 924, 142 L. Ed. 2d 929 (1999); Pocono Invitational, 317 F. Supp. 2d at 583-84 (concluding rules relating to recruitment at summer camps are like eligibility rules and were enacted in spirit of promoting amateurism in keeping with NCAA's general goals): College Athletic Placement Serv. Inc. v. NCAA, No. 74-1144, 1974 U.S. Dist. LEXIS 7050, 1974 WL 998, at *4-5 (D.N.J. Aug. 22, 1974) (finding NCAA policy against for-profit companies [*23] that find athletic scholarships for student-athletes was motivated by intent to ensure academic standards and amateurism, not by anti-competitive motive or intent). But when the challenged conduct restrains revenue, output, or salaries, the rules are almost always commercial. E.g., NCAA v. Bd. of Regents of Univ. of Okla., 468 U.S. 85, 113, 104 S. Ct. 2948, 82 L. Ed. 2d 70 (1984) (finding NCAA's television plan amounted to unlawful horizontal restraint on members' ability to sell television rights to their games because it operated to raise prices and reduce output); Law v. NCAA, 134 F.3d 1010, 1012 (10th Cir. 1998) (affirming injunction against NCAA's enforcement of rule that limited salaries of entry-level coaches as unlawful horizontal restraint on trade). The Court finds these cases useful in this case because they suggest a spectrum of conduct to evaluate Defendants' alleged conduct. Compared to this range of conduct. SEI has not sufficiently alleged that Defendants' conduct is commercial in nature. Considering the totality of circumstances and SEI's allegations, FASB sought voluntary comments from the public in an effort to establish and promulgate accounting standards for public companies within the United States, [*24] which is FASB's exclusive prerogative.3 Defendants also adopted the Website Terms to reserve FASB's right to use any submissions for any purpose, including reproduction, disclosure, and publication. SEI's allegations do not suggest conduct that is commercial in nature - there is no sale, no exchange. and no production. Compare, e.g., Brown Univ., 5 F.3d at 668 (determining financial assistance for students is part and parcel of price-setting process and, thus, is a commercial transaction), with, e.g., Apex Hosiery, 310 U.S. at 501-02 (concluding labor union strike intended to compel company to accede to demands not trade or commerce despite delaying interstate shipment of goods); Marjorie Webster Junior Coll., Inc. v. Middle States Ass'n of Colls. & Secondary Schs., 432 F.2d 650, 654-55, 139 U.S. App. D.C. 217 (D.C. Cir. 1970) (finding non-profit organization's decision to deny accreditation to for-profit school not commercial absent intent or purpose to affect commercial aspects).

3 The SEC has recognized FASB as the only entity whose work-product can be recognized as "generally accepted" for the purpose of public companies' financial reporting. Commission Statement of Policy Reaffirming the Status of the FASB as a Designated Private-Sector Standard Setter, 68 Fed. Reg. 23,333, 23,333-34 (May 1, 2003); [*25] see Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 108, 116 Stat. 745, 768-69 (codified at 15 U.S.C. 77s). Congress also ensured FASB would remain independent from the targets of its standards by creating an independent source of funding for FASB so that it no longer had to depend on voluntary contributions or sales of its standards. Donna M. Nagy, Playing Peekaboo with Constitutional Law: The PCAOB and Its Public/Private Status, 80 Notre Dame L. Rev. 975, 987-89 (2005); see Sarbanes-Oxley Act 109 (codified at 15 U.S.C. 7219). SEI contends FASB's conduct is commercial because SEI itself is a commercial enterprise and Defendants misappropriated its patented Invention. But it is the nature of the conduct that controls, not the nature of the organizations. The alleged conduct enables FASB to solicit voluntary submissions of accounting-standard proposals, and then perform its function of establishing and promulgating those standards without being hamstrung by subsequent intellectual property claims. Any economic consequence is an indirect by-product of these efforts. SEI has not alleged that Defendants derive any economic benefit from the Website Terms - it does not allow them [*26] to control production, innovation, or quality by asserting an exclusive right in submitted concepts and it does not permit them to set a price. All the Website Terms appear to do is facilitate FASB's consideration and promulgation of appropriate accounting standards for public companies in the United States. SEI's allegations suggest nothing more. For the foregoing reasons, the Court concludes that SEI has failed to sufficiently allege that Defendants are subject to antitrust scrutiny because it has failed to allege facts showing the challenged conduct is commercial in nature. The Court will grant SEI leave to amend its complaint to address these deficiencies. The Court reserves decision on certain other legal arguments made by Defendants until SEI has amended its Complaint. C. California Law Claims The Court will reserve decision on exercising supplemental jurisdiction until SEI has the opportunity to amend those claims over which the Court has original jurisdiction. The Court will determine at that time
whether to exercise supplemental jurisdiction over SEI's California law claims. See 28 U.S.C. 1367(a), (c). IV. Court's Review of Discussion at Oral Argument Prior to oral argument, the [*27] Court posed questions in a letter to counsel, including whether the parties would agree to expedite the hearing on the declaratory judgment aspect of the case and stay the antitrust claims. Plaintiff's counsel indicated that Plaintiff was interested in such a proposal. Defendants would prefer a decision on the grounds stated in its Motion to Dismiss before entertaining such an agreement. After discussing whether Plaintiff sufficiently pleaded its claims, it became obvious to the Court that Plaintiff would welcome the chance to amend the complaint, if only to provide more factual allegations, as now required by Twombly and Iqbal. The Court indicated it would grant that relief. The argument contained many good points about the value of standard-setting organizations having an open mind to suggestions and ideas put forward by segments of the industry the organization serves. Defendants assert vigorously that it must have the ability to learn from submissions, such as those made by Plaintiff, and to consider and possibly use them in evolving formulations of industry standards. The Court believes that this is sound public policy and that the antitrust laws were not designed to interfere with [*28] such a process. It also become clear that Plaintiff, as of yet, has not tried to gain commercial value from its patent, but understandably reserved the right to do so in the future. At the argument, defense counsel unconditionally renounced any ownership interest by Defendants in Plaintiff's Invention. After the argument, the Court indicated it would grant leave to Plaintiff to amend its Complaint. The Court also noted that the positions of the parties should be amenable to a settlement of this dispute, and that a prolonged litigation over such issues as standing, relevant markets, and anti-competitive intent do not seem to be necessary for Defendants to continue their work, and for Plaintiff to, if it so desires. use its patent in a commercial setting. The Court encouraged the parties to work towards a written agreement and, if requested, the undersigned will be available after September 18th to meet with counsel, assuming they have made some progress towards agreement on a written statement and both are desirous of completing the agreement as a means of settling this case. For the above reasons, Plaintiff is granted leave to file an amended complaint by September 30, 2011. V. Conclusion

For [*29] the foregoing reasons, the Court will grant in part and deny in part Defendants' Motion to Dismiss. The Court will grant SEI leave to amend its Complaint in conformity with this Memorandum by September 30, 2011. An appropriate Order will follow. ORDER AND NOW, on this 17th day of August, 2011, upon careful consideration of Defendants' Motion to Dismiss (ECF No. 18). the parties' briefing, and oral argument on the Motion, it is hereby ORDERED as follows: 1. Defendants' Motion is GRANTED in part and DENIED in part in accordance with the accompanying Memorandum. 2. Plaintiff Silicon Economics, Inc. is granted leave to file an amended complaint to cure the deficiencies identified in
the accompanying Memorandum by September 30, 2011. 3. Defendants shall have twenty-one (21) days from service of an amended complaint to answer, move, or otherwise plead. 4. Plaintiff shall respond to any defense motion or other pleading within twenty-one (21) days of service of such motion or pleading. 5. Defendants shall reply, if at all, within fourteen (14) days of service.
BY THE COURT: /s/ Michael M. Baylson Michael M. Baylson, U.S.D.J.

Page 1
COMMONWEALTH OF PENNSYLVANIA v. RUSSELL STOVER CANDIES, INC., et al. CIVIL ACTION NO. 93-1972 UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA 1993 U.S. Dist. LEXIS 6024; 1993-1 Trade Cas. (CCH) P70,224
May 6, 1993, Decided May 6, 1993, Filed, Entered OPINION BY: BY THE COURT; DONALD W. VANARTSDALEN OPINION MEMORANDUM OPINION AND ORDER VanARTSDALEN, S.J. May 6, 1993 On April 15, 1993, plaintiff, the Commonwealth of Pennsylvania, filed this action alleging that the acquisition of the Division of Pet, Inc. (Pet), known as Whitman's Chocolates (Whitman's), by Whitman's Candies, Inc. (WCI), violates federal antitrust law, specifically section 7 of the Clayton Act, 15 U.S.C. 18. Pennsylvania seeks an injunction preventing Pet from transferring any remaining assets in its Whitman's Chocolate Division to WCI, and ordering that WCI divest itself of assets that have been previously transferred to it by Pet. Defendants Russell Stover, Inc. (Stover) and WCI have filed a motion to dismiss this action, joined in by Pet, contending that the Commonwealth of Pennsylvania lacks standing to seek the requested relief. (filed Doc. No. 12). After holding a conference on plaintiff's application for a temporary restraining order filed with the complaint, I scheduled a hearing for April 26, 1993, on plaintiff's application for a temporary restraining order and/or preliminary injunction. (filed Doc. No. 5). Presently [*2] pending are plaintiff's motion for a preliminary injunction requesting essentially mandatory divestiture by WCI, and defendants' motion to dismiss for lack of standing. On April 26, 1993, and on April 27, 1993, a full evidentiary hearing and argument was held on these
COUNSEL: For COMMONWEALTH OF PENNSYLVANIA, PLAINTIFF: CARL S. HISIRO, JAMES A. DONAHUE, III, THOMAS L. WELCH, OFFICE OF ATTORNEY GENERAL, 1435 STRAWBERRY SQUARE, HARRISBURG, PA 17120, USA. For RUSSELL STOVER CANDIES, INC., WHITMAN'S CANDIES, INC., DEFENDANTS: JOHN J. SOROKO, MICHAEL M. BAYLSON, DUANE, MORRIS & HECKSCHER, 4200 ONE LIBERTY PLACE, 39TH FL., PHILA, PA 19103-7396. For PET, INC., DEFENDANT: STEVEN R. FISCHER, HANGLEY, CONNOLLY, EPSTEIN, CHICCO, FOXMAN AND EWING, 1515 MARKET STREET, 9TH FL., PHILA, PA 19102, USA. WILLIAM BLUMENTHAL, SUTHERLAND, ASBILL & BRENNAN, 1275 PENNSYLVANIA AVENUE, NW, WASHINGTON, DC 20004-2404, USA. For LOCAL 6, BAKERY, CONFECTIONERY & TOBACCO WORKERS UNION, AFL-CIO, MOVANT: MICHAEL KATZ, METANZE & KATZ, 15TH & LOCUST STREETS, 1200 LEWIS TOWER BLDG., 12TH FL., PHILA, PA 19102, USA. For PITTSBURGH FOOD & BEVERAGE COMPANY, INC., D. L. CLARK COMPANY, JAMES RAWLINGS, MOVANTS: DAVID J. HUMPHREYS, HUMPHREYS, NUBANI & BREAULT, P.C., 707 GRANT STREET, 3800 GULF TOWER, PITTSBURGH, PA 15219-1913, USA. JUDGES: [*1] VanArtsdalen

Page 2 1993 U.S. Dist. LEXIS 6024, *; 1993-1 Trade Cas. (CCH) P70,224
motions. Defendants' motion to dismiss will be denied as I find that plaintiff, the Commonwealth of Pennsylvania, has parens patriae standing to maintain this action. However, plaintiff has failed to show a likelihood of success on the merits. Therefore, plaintiff's motion for a preliminary injunction will be denied. In accordance with Federal Rule of Civil Procedure 52, I enter the following findings of fact and conclusions of law. I. Findings of Fact 1. Plaintiff is the Commonwealth of Pennsylvania, suing in its parens patriae capacity. 2. Defendant, Pet, Inc., (Pet) is a publicly held corporation based in Missouri that operates a division known as the Whitman's Chocolates Division (Whitman's), producer of the "Whitman's Sampler," boxed chocolates, and other confectionery items. 3. Defendant, Whitman's Candies Inc. (WCI), is a Missouri Corporation owned by Scott Ward, Tom Ward, and Linda Ward. (P-unmarked, [*3] Merrifield Dep. at 45-46). 1 1 Plaintiff's exhibits will be referred to as P-unmarked, P-1, etc., and defendants' as D-1, etc. 4. Defendant, Russell Stover, Inc. (Stover), is a privately held company based in Missouri. It manufactures and sells boxed chocolates and other confectionery items. 5. Whitman's has experienced declining sales and profits in recent years. 6. Pet has no intent to continue manufacturing the Whitman's line of chocolates after the scheduled plant closing in May, 1993, regardless of the outcome of this proceeding. 7. In June of 1992, Pet announced its intention to sell Whitman's, either as an operating concern, if possible, otherwise to liquidate Whitman's by sale of its assets. 8. In its efforts to sell the assets of the Whitman's Division, Pet engaged the investment banking firm of Lazard Freres & Co. (Lazard). 9. Lazard prepared a confidential memorandum, (P-8, Lazard Memorandum), to be given to parties seriously interested in purchasing Whitman's assets. 10. The Lazard Memorandum was given [*4] only to those apparently seriously interested parties who agreed to sign a confidentiality agreement. 11. Although several parties indicated interest in purchasing the assets of Whitman's, only approximately
six or seven parties obtained a copy of the Lazard Memorandum. 12. On or about March 5, 1993, WCI purchased certain assets of Whitman's from Pet, including the Whitman's Trademark, recipes, trade secrets, and certain equipment. 13. Termination of production at Whitman's only plant, located in Philadelphia, Pennsylvania, is contemplated for early May, 1993, after exhaustion of Whitman's existing raw materials and packaging. 14. Under the agreement of sale, Pet may continue to use the Trademark, and various other Whitman's assets until final distribution and sale of Whitman's product inventory which is in existence at the time of the termination of production at Whitman's Plant. 15. It is unclear what the relevant product market is for antitrust purposes. 16. Gift boxed chocolates, brand name boxed chocolates, and boxed chocolates are similar products distributed through similar outlets and are substitutes. 17. Other boxed confectionery products, such as peanut brittle, fudge, [*5] and nut clusters, compete with boxed chocolate for sales, and are substitutes. 18. The boxed chocolate industry and the confectionery industry in general are highly competitive. 19. Distribution outlets that sell boxed chocolates to ultimate consumers include national and regional chain drugstores, national and regional mass merchandisers, manufacturer's retail stores, local drugstores, department stores, and specialty candy stores. Ultimate consumers also purchase boxed chocolates and other confectionery items through mail order catalogues published by various distributors, including manufacturers and wholesalers. 20. Chain drugstores and mass merchandisers, 2 as purchasers of boxed chocolates, have considerable if not complete control over what brand of boxed chocolates are sold and displayed in their stores and the retail pricing of those items. Some chain drugstores and some mass merchandisers frequently select Stover's and Whitman's boxed chocolates from a variety of manufacturers' boxed chocolates to sell nationally. 2 Chain drugstores include companies such as Rite-Aid, Thrift Drugs, Eckerd's, Pharmor, Revco and CVS, and mass merchandisers include companies such as K-Mart, Wal-Mart, and Target. The witnesses interchangeably referred to chains and chain drugstores, and also interchangeably referred to mass merchandisers, mass marketers, and mass marketeers.

[*6] 21. Stover's boxed chocolates and Whitman's boxed chocolates directly compete for sales. Testimony Ms. Beatrice Cozzolino 22. Beatrice Cozzolino, a forklift operator at Whitman's, testified that at annual meetings Whitman's executives mentioned Stover as its competitor. Ms. Cozzolino also testified that the Whitman's employees received notice that the plant will close on or about May 8, 1993. Ms. Blanche Standback 23. Blanche Standback, an hourly supervisor in packaging who has worked for Whitman's for thirty-nine years, testified, based on discussions at annual employee meetings, that Whitman's considered Stover as its "chief competitor." Mr. Jay Shoemaker 24. Jay Shoemaker, former President and CEO of Whitman's from approximately August, 1990, until approximately June, 1991, was hired by Whitman's because of his experience with and knowledge of mass merchandisers and chain drugstores. Mr. Shoemaker described his hiring as a "turn around situation." 25. According to Mr. Shoemaker, previous to his employment at Whitman's, Pet had neglected Whitman's and advertising for Whitman's products had been eliminated. Also, he testified that Whitman's had suffered [*7] "customer deterioration." Part of Whitman's difficulties stemmed from Whitman's rapid price increases, which were not followed by competitors. Whitman's strategy at the time Mr. Shoemaker was President and CEO was to make Whitman's boxed chocolates more attractive for purchase as a gift. 26. The channels of distribution, according to Mr. Shoemaker, are relevant to defining the applicable market. He testified that with respect to particular channels of distribution the consumers within a particular channel are similar and purchase boxed chocolates for similar occasions. 27. Mr. Shoemaker placed Whitman's in the middle priced tier of the branded boxed chocolate market. He testified that the other competitors in the middle priced tier of the branded boxed chocolate market were Stover, See's, Fannie Mae, and Fannie Farmer. According to Mr. Shoemaker, only Stover competed on a national level with Whitman's, and See's, Fannie Mae, and Fannie Farmer were regional competitors. 28. Mr. Shoemaker testified that there is heavy competition for shelf space within mass merchandisers and chain drugstores.
29. Mr. Shoemaker stated that boxed fudge, nut clusters, and peanut brittle compete with boxed [*8] chocolate for sales. 30. According to Mr. Shoemaker, Asher's, a chocolatier located in Germantown, Pennsylvania, does not compete on a regional basis with Whitman's because Mr. Shoemaker considers Asher's inferior in quality and considers Asher's boxed chocolates to be located as a competitor in the lower price tier of the boxed chocolate market. 31. Mr. Shoemaker testified that mass merchandisers and chain drugstores often sold the Whitman's Sampler at $ 3.99, which was below the manufacturer's wholesale price. Mr. Thomas McNulty 32. Thomas McNulty, who currently works as New Business Development Manager for New England Confectionery Co. of Cambridge, Massachusetts (NECCO), was a former Vice-President of Sales for Whitman's from 1986 until 1990. Mr. McNulty has nearly forty years of experience in the confectionery industry. NECCO produces Candy Cupboard boxed chocolates. Mr. McNulty testified that Candy Cupboard's Masterpieces, a line of boxed chocolates, is sold nationally through K-Mart. He further testified as to what he considers to be two separate product markets: gift boxed chocolates and promotional boxed chocolates. Attempting to distinguish between the two, Mr. McNulty [*9] described promotional boxed chocolates as typically being chocolates packaged in boxes containing larger quantities of chocolate pieces and purchased for office or family consumption. 33. Mr. McNulty testified that although he would consider Whitman's Sampler to be a gift boxed chocolate, in the opinion of some in the industry, Whitman's Sampler has become a promotional boxed chocolate. The perception of Whitman's Sampler as a promotional boxed chocolate is perhaps due to the fact that mass merchandisers and chain drugstores often sell the Whitman's Sampler at a retail price of $ 3.99, a price less than that at which Whitman's sells the product to the retail outlets. 34. Mr. McNulty testified that in general the boxed chocolate business is highly competitive, and has become even more competitive in the past year. 35. Mr. McNulty testified that the buyers for mass merchandisers and chain drugstores are constantly called upon by purveyors of confections, including boxed chocolates, who would like to sell their products to and obtain store shelf space from the mass merchandisers and chain drugstores for retail distribution.

36. Mr. McNulty testified that significant competition exists [*10] for shelf space in the chain drugstores and in mass merchandisers. 37. Mr. McNulty testified that promotional boxed chocolates were developed at the request of retailers. 38. Mr. McNulty testified that Hershey's, Mars, and Nestle's have considerable influence with mass merchandisers and chain drugstores, and admitted on cross-examination that all manufacture boxed chocolates. 39. Mr. McNulty testified that the ultimate consumer of boxed chocolates and confections in general has a wide array of outlets to choose from when purchasing boxed chocolates and confections, including department stores, manufacturers' retail stores, specialty candy stores, and through mail order catalogues, in addition to mass merchandisers and chain drugstores. 40. Based on his extensive experience in the confectionery business, and on available information in the confectionery industry, Mr. McNulty testified as to his estimates of Whitman's and Stover's current respective percentage of sales in a particular market segment. Mr. McNulty based this testimony on United States Commerce Department figures for confectionery products, National Confectioners Association data, sales information based on his experience [*11] with confections, and information in newspaper and magazine articles. The percentages estimated by Mr. McNulty were for branded gift boxed chocolates sold through mass merchandisers and chain drugstores. According to Mr. McNulty, Whitman's accounted for approximately 15-20% and Stover's accounted for 50%. 41. Mr. McNulty stated that Hershey's, Mars, and Nestle's have the resources (productive, financial, and strategic) to enter the national gift boxed chocolate market. Mr. James L. Rawlings 42. After Pittsburgh Food & Beverage Company, Inc., obtained a copy of the Lazard Memorandum, James L. Rawlings, who serves as a consultant, representative, and agent for Pittsburgh Food & Beverage Company, Inc., discussed with Mr. Gold of Lazard the potential interest of Pittsburgh Food & Beverage in acquiring the assets of Whitman's that Pet intended to sell. 43. The sum of Mr. Rawlings' testimony is that Pittsburgh Food & Beverage Company, Inc., expressed interest in Whitman's assets to Mr. Gold of Lazard, and if Whitman's assets were again available for sale, Pittsburgh Food & Beverage Company, Inc., would still be interested in purchasing the assets. However, Mr. Rawlings never communicated [*12] to Mr. Gold a firm of-
fer from Pittsburgh Food & Beverage for the purchase of Whitman's assets. Mr. Eugene Smith 44. Eugene Smith, a consultant and private investor for Mr. Sagra, spoke with Mr. Gold on behalf of Mr. Sagra concerning Mr. Sagra's potential interest in Whitman's. Mr. Smith testified that neither he nor Mr. Sagra received a copy of the Lazard Memorandum, and Mr. Sagra was not allowed access to Whitman's plant. Apparently, Mr. Sagra refused to sign the confidentiality agreement Whitman's required before it would allow access to the plant or provide a copy of the Lazard Memorandum. Dr. John L. Stanton 45. Dr. Stanton, professor and the C.J. McNutt Chair of Food Marketing Research in the Department of Food Marketing at St. Joseph's University, has a Ph.D. in marketing from Syracuse University and extensive experience in the field of marketing as a professor and consultant. 46. Dr. Stanton testified that significant competition exists for shelf space in chain drugstores and in mass merchandisers. 47. For a portion of his testimony, Dr. Stanton relied on certain documents prepared by Whitman's, such as the Lazard Memorandum (P-8) and Whitman's Marketing Plan [*13] for 1992-1993 (P-19). 3 3 Although admissible as against Pet, both documents, as well as testimony based on those documents, on objection was ruled inadmissible as against WCI and Stover. 48. Based on his experience in marketing, Dr. Stanton testified as to the importance of marketing plans and the general reliability of information contained within those plans. Based on his review of P-19, Whitman's is a chief competitor of Stover. 49. Dr. Stanton testified that Whitman's and Stover have high brand name recognition with consumers, which is also referred to as brand equity. 50. Dr. Stanton described the substantial control that retailers have over their scarce shelf space and testified that retailers such as chain drugstores and mass marketers often charge slotting allowances, a rental fee for the shelf space, and "goodbye money," which is a fee retailers charge manufacturers for taking unsuccessful products off the shelves. 51. Dr. Stanton testified that Hershey's, Mars, and Nestle's have considerable influence [*14] with mass merchandisers and chain drugstores.

52. Dr. Stanton testified that the ultimate consumer of boxed chocolates and confections in general has a wide array of outlets to choose from when purchasing boxed chocolates and confections, including Department Stores, Manufacturer's Retail Stores, and Specialty Candy Stores. Mr. Michael H. Siemer 53. Mr. Michael H. Siemer, C.P.A., is Vice-President of Operations Control and Analysis at Pet. 54. In 1989, Mr. Siemer recommended to Pet that it sell Whitman's assets. 55. Since 1985, Whitman's sales volume have declined and the costs for the manufacture of its products have increased due to the age of its factory, an increase in competition, and the inefficient methods of distribution utilized by Whitman's. 56. Mr. Siemer testified that Whitman's had suffered losses in recent years. 57. Pet decided to sell Whitman's assets because the Division required substantial capital investment if it was to continue operations due to the seasonal nature of its sales, it was suffering declining sales, and it did not fit into Pet's overall corporate plans. 58. Mr. Siemer was involved in the preparation of the Lazard Memorandum. He testified [*15] that reliable industry data for market share purposes is unavailable, and that certain numbers provided in the Lazard Memorandum are based solely on estimates of Whitman's management, as clearly noted in the Lazard Memorandum itself. Although he described the numbers as management's best estimates, he also characterized them as unreliable for market share purposes due to lack of accurate industry data and the purpose for which the estimates were prepared. 59. According to Mr. Siemer's testimony, Pet does not intend to continue to operate Whitman's after the plant closing, even if WCI is ordered to divest of Whitman's assets. Other Evidence Mr. Thomas Merrifield 4 4 Plaintiff introduced into evidence the deposition of Mr. Thomas Merrifield, the vice-president of WCI. (P-Unmarked, Merrifield Dep.). 60. Mr. Merrifield was not sure if the Whitman's Sampler should be categorized as a gift boxed chocolate or promotional boxed chocolate. (Merrifield Dep. at 35).
61. Whatever market category the Whitman's Sampler [*16] currently falls into, WCI intends to manufacture and market the Whitman's Sampler as a gift boxed chocolate. (Merrifield Dep. at 36). 62. According to Mr. Merrifield, the retailer determines whether a boxed chocolate is a promotional boxed chocolate or a gift boxed chocolate. (Merrifield Dep. at 32). 63. Mr. Merrifield also stated that as to sales of boxed chocolates to national chain drugstores and mass merchandisers, Whitman's was Stover's number one competitor, (Merrifield Dep. at 19), and that boxed chocolates are Stover's best selling product, accounting for 50% of Stover's total sales. (Merrifield Dep. at 11). Stipulation as to Purchase of Certain Confectionery Items 64. Defendants introduced into evidence a stipulation between plaintiff and defendants, for purposes of the preliminary injunction hearing, providing a list of described items that were purchased since the filing of the complaint at the indicated locations and prices. (Defs. Ex. Nos. 100-169, filed Doc. No. 24). The list includes confectionery products ranging in price, description, and outlet where purchased. 65. This evidence shows, as does the testimony of plaintiff's witnesses, that there is an abundance [*17] of competition in the market for chocolates in general, including boxed chocolate products purchased for gift-giving, and there is a variety of outlets from which ultimate consumers can purchase those products. Lazard Memorandum 66. The Lazard Memorandum, principally relied on by plaintiff, provides a general description of the United States confectionery market, and the United States chocolate confectionery market, and describes boxed chocolates as a segment of this market. II. Discussion Standard for Preliminary Injunction In order to determine whether a preliminary injunction should issue, the court must weigh the following factors: 1) whether the plaintiff has a reasonable probability of success on the merits; 2) whether the plaintiff will be irreparably harmed if the injunction does not issue; 3) whether other interested parties will be harmed by either a grant or denial of the injunction; and 4) whether issuance of the injunction is in the public interest. Plaintiff has the burden of showing that it will likely succeed on the merits and that it will be irreparably harmed if the preliminary injunction does not issue. If plaintiff makes

this prerequisite showing, [*18] then I must determine the weight of the other two factors, namely, harm to other interested parties and the public interest, to determine if the preliminary injunction should issue. See Eli Lilly and Co. v. Premo Pharmaceutical Labs., 630 F.2d 120, 136 (3d Cir.), cert. denied, 449 U.S. 1014 (1980). A preliminary injunction is ordinarily granted for the purpose of maintaining the status quo during the litigation. Divestiture is an appropriate remedy under the Clayton Act, California v. American Stores, Co., 495 U.S. 271 (1990); however, plaintiff's request for a preliminary injunction ordering that WCI mandatorily divest of Whitman's assets seeks not to maintain but rather to alter the status quo. United States v. Price, 688 F.2d 204 (3d Cir. 1982), provides that under appropriate circumstances a district court may direct mandatory preliminary injunctive relief. 688 F.2d at 210-212. Because plaintiff seeks to alter the status quo by requesting mandatory preliminary relief, plaintiff's burden of establishing entitlement to that preliminary [*19] relief is heightened. Punnett v. Carter, 621 F.2d 578, 582 (3d. Cir. 1980). Applying either the traditional or heightened standard, plaintiff has failed to meet its burden. Antitrust Standing Defendants raise the issue of plaintiff's standing in their motions in opposition to issuance of a preliminary injunction and in their motions to dismiss the complaint. Defendants assert that parens patriae standing is lacking in this case, and therefore, the preliminary injunction should be denied for failure to show that Pennsylvania, lacking standing, will likely succeed on the merits. They further assert that the case should be dismissed based on the same reason. Parens patriae is a concept of standing utilized to allow states to protect quasi-sovereign interests 5 such as the health, comfort, and welfare of the people of a state and the general economy of that state. Gibbs v. Titelman, 369 F. Supp. 38, 54 (E.D. Pa. 1973), rev'd on other grounds, 502 F.2d 1107 (3d Cir.), cert. denied, 419 U.S. 1039 (1974). A state can sue as parens patriae for the [*20] protection of its people or its general economy. See Alfred L. Snapp & Son, Inc. v. Puerto Rico, 458 U.S. 592, 607 (1982), Georgia v. Pennsylvania R.R., 324 U.S. 439, 446-448 (1945). This ability of a state to seek protection of its general economy in the federal as well as the state forum has been well recognized and includes suits under federal antitrust law. As Justice Douglas stated in Georgia v. Pennsylvania R.R., 324 U.S. 439 (1945), "suits by a State, parens patriae, have long been recognized. There is no reason why those suits should be excluded from the purview of the anti-trust acts." 324 U.S. at 447. Georgia v. Pennsylvania R.R. involved a suit brought by the State of Georgia, parens patriae, seeking
an injunction under federal antitrust law. The Supreme Court held that Georgia could maintain the suit. 5 "A state that sues as parens patriae must seek to redress an injury to an interest that is separate from the interests of particular individuals." People of State of New York by Abrams v. Seneci, 817 F.2d 1015, 1017 (2d Cir. 1987). [*21] Defendants principally rely on Cargill, Inc. v. Monfort of Colorado, Inc., 479 U.S. 104 (1986), in asserting that Pennsylvania does not have parens patriae standing to pursue this action to prevent harm to its general economy. Defendants read Cargill as effectively overruling Georgia v. Pennsylvania R.R., as it applies to parens patriae actions seeking an injunction under federal antitrust law. Particular importance is attached by defendants to the statement in Cargill that it would be anomalous to allow a party to seek an injunction to prevent harm when the party would not have standing to seek damages if the harm were to occur. Cargill, 479 U.S. at 112. 6 The Supreme Court in Hawaii v. Standard Oil Co., 405 U.S. 251 (1972), held that states cannot seek damages for injury to a state's general economy caused by a violation of federal antitrust law. Thus, defendants argue, a state cannot seek injunctive relief for harm to its general economy. 6 The Court stated that "it would be anomalous, we think, to read the Clayton Act to authorize a private plaintiff to secure an injunction against a threatened injury for which he would not be entitled to compensation if the injury actually occurred." Cargill, Inc. v. Monfort of Colorado, 479 U.S. at 112. [*22] A close look at both Standard Oil Co. and Cargill suggests to me that, under Georgia v. Pennsylvania R.R., a state may still seek injunctive relief for harm to its general economy that is caused by a violation of federal antitrust law. The Supreme Court in Standard Oil Co. recognized the difficulty in allowing damage awards for harm to a state's general economy. While theoretically cognizable as a direct injury, the practicalities of attempting to measure damages and the likelihood of duplicative recovery counselled against permitting state suits for damages to that state's general economy. However, the parties in Standard Oil Co. did not suggest that lack of availability of damages affected the availability of injunctive relief. 405 U.S. at 256 n.7. 7 7 The Court stated that "although the Court of Appeals directed that the count be dismissed in its entirety, the parties have not suggested that its decision foreclosed any relief the State might ob-

tain by way of injunction." Standard Oil Co., 405 U.S. at 256 n.7. [*23] In fact, Justice Marshall, delivering the opinion of the Court in Standard Oil Co. reiterated the holding of Georgia v. Pennsylvania R.R. and stated that the Court upheld Georgia's claim as parens patriae with respect to injunctive relief, but had no occasion to consider whether the antitrust laws also authorized damages for an injury to the State's economy . . . . Nowhere in Georgia did the court address itself to the question whether 4 of the Clayton Act authorizes damages for an injury to the general economy of a State. Thus, the question presented here is open.
parens patriae, defendants fail to realize possible nuances between an individual and a state which are relevant to the issue of antitrust standing. The Commonwealth asserts that it seeks through this action to prevent the harm that WCI's acquisition of Whitman's would cause to the general economy of Pennsylvania due to a substantial decrease in competition. At least for purposes of deciding the pending motion for a preliminary injunction, I conclude that Pennsylvania has standing to proceed under the doctrine of parens patriae. Therefore, defendants' motion to dismiss will be denied. However, before any relief may be granted on Pennsylvania's claim as parens patriae, plaintiff will have to prove an antitrust injury to the general economy of Pennsylvania. Antitrust Law Plaintiff is bringing this suit under 15 U.S.C. 18. Section 18 provides: No person engaged in commerce or in any activity affecting commerce shall acquire, directly or indirectly, the whole or any part of the stock or [*26] other share capital and no person subject to the jurisdiction of the Federal Trade Commission shall acquire the whole or any part of the assets of another person engaged also in commerce or in any activity affecting commerce, where in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.
405 U.S. at 260. Justice Marshall's opinion indicates that a state's parens patriae standing to seek an injunction to prevent harm to the state's general economy caused by a violation of federal antitrust law remains a closed question until the Court expressly decides to revisit that issue. In Cargill the issue of a state's parens patriae standing to seek an injunction under federal antitrust law to prevent harm to the state's general economy was not before the Supreme Court and the Court did not suggest any intention to eradicate the traditional precepts [*24] of parens patriae standing for purposes of injunctive relief. Although the Court in Cargill did state that it would be anomalous to allow a private party to sue for an injunction when that party could not sue for damages, and the state is considered a private party under the antitrust laws, the Supreme Court did not discuss Georgia v. Pennsylvania R.R. Georgia v. Pennsylvania R.R. involved precisely the anomaly intimated in Cargill and the Court in Georgia v. Pennsylvania R.R. found that although Georgia had standing to seek an injunction preventing the antitrust behavior, it would not have standing to seek damages. Georgia v. Pennsylvania R.R., 324 U.S. at 453. It would be imprudent to infer that Cargill intended to overrule Georgia v. Pennsylvania R.R., when the issue of parens patriae standing was not before the court. The contours of antitrust standing as it relates to a state in its parens patriae capacity are perhaps different from antitrust standing as it applies to other private parties. Precedent involving standing of individual private parties may not control the issue of parens patriae standing as those [*25] cases do not implicate quasi-sovereign interests. Although the state is considered a private party, to some extent, when it brings an action
15 U.S.C. 18 (emphasis added). Plaintiff asserted on the second day of the hearing that it does not contend that WCI's purchase of the Whitman assets from Pet will tend to create a monopoly. Therefore, the issue is whether Pennsylvania is likely to succeed in proving at trial that the effect of WCI's acquisition of Whitman's assets may be substantially to lessen competition in a line of commerce. Pennsylvania bears the burden of proving that the acquisition of Whitman's assets by WCI may substantially lessen competition in a line of commerce. Plaintiff argues that WCI is in effect controlled by Stover, so that WCI's acquisition of Whitman's should be viewed as if Stover had actually acquired the assets. The majority [*27] of the evidence dealt with comparison of Stover and Whitman's, apparently equating WCI, the actual purchaser of Whitman's assets, with Stover for purposes of this antitrust action.

Although Stover is not directly acquiring the assets of Whitman's, apparently plaintiff intends to show that Stover will control WCI, and therefore, acquisition of Whitman's by WCI may substantially lessen competition by virtue of Stover's influence on WCI decisionmaking. Stover's Potential Control of WCI The deposition of Mr. Merrifield, the Vice President of WCI, (P-unmarked, Merrifield Dep. at 3), provides some evidence of the connection. Mr. Merrifield served as Vice President of Eastern Sales for Russell Stover prior to his current position as Vice President of WCI, and had been employed by Stover since he graduated from college. (Merrifield Dep. at 4-5). A few responses by Mr. Merrifield in his deposition relate to commonality of ownership. Mr. Merrifield engaged in the following colloquy with plaintiff's counsel: Q. Are you still presently employed at Russell Stover?
tremely weak, the evidence produced for purposes of deciding the preliminary injunction motion will suffice. For present purposes only, I will accept plaintiff's contention that the purchase by WCI is functionally the same as a purchase by Stover, and I will view the effect of WCI's acquisition as if Stover had directly acquired the assets of Whitman's. Geographic [*29] Market Ordinarily, plaintiff bears the burden of proving the relevant geographic market as an essential element of its antitrust claim. See United States v. Marine Bancorporation, 418 U.S. 602, 618 (1974). Plaintiff asserts that the United States is the relevant geographic market. Defendants do not contest plaintiff's allegation that the United States constitutes the relevant geographic market for purposes of the preliminary injunction. Utilizing the entire United States as the relevant geographic market, I must determine whether plaintiff has shown that it will likely succeed in proving that WCI's purchase of Whitman's assets may substantially lessen competition on a nationwide basis within the relevant product market. Relevant Product Market In order to show the likely effect on an area of competition of WCI's acquisition of Whitman's, plaintiff's must show what the line of commerce is that it contends may be substantially effected. See Marine Bancorporation, 418 U.S. at 618 (1974). This is determined with reference to the relevant product market. See Brown Shoe Co. v. United States, 370 U.S. 294, 324 (1962). [*30] Plaintiff suggests alternative choices for what the relevant market is, asserting that it is either branded gift boxed chocolates sold nationally through chain drugstores and mass marketers, or it is the slightly broader market of boxed chocolates sold through those same channels of distribution. "The boundaries of the relevant market must be drawn with sufficient breadth to include the competing products of each of the merging companies and to recognize competition where, in fact, competition exists." Brown Shoe Co., 370 U.S. at 326. In determining the relevant product market, well-defined submarkets may exist which constitute the relevant product market for antitrust purposes. Id. at 325. "The boundaries of such a submarket may be determined by examining such practical indicia as industry or public recognition of the submarket as a separate economic entity, the product's peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes, and specialized vendors." Id. Mr. Shoemaker and Mr. McNulty differentiated gift boxed chocolates from other confectionery [*31] prod-
A. I'm employed by Whitman's Candies, Inc. [WCI].
Q. You resigned from Russell Stover?
A. No, I was [*28] appointed to vice-president of Whitman's Candies, Inc., when we bought the company. . . .
Q. When you say "we," do you mean Russell Stover?
A. Yes.
(Merrifield Dep. at 13). Mr. Merrifield stated that: Tom Ward, Scott Ward, and Jack Carr will have input into pricing decisions at WCI, (Merrifield Dep. at 20); Jack Carr is employed by Stover and not by WCI, but will have pricing input at WCI, (Merrifield Dep. at 20-21); and Tom Ward, Vice-President of Stover, and Scott Ward, President of WCI, each own one-third of WCI, (Merrifield Dep. at 20). WCI will use Stover's distribution centers. (Merrifield Dep. at 25). However, Mr. Merrifield testified that WCI is an entirely separate entity from Stover. (Merrifield Dep. at 46). Although, plaintiff's evidence to establish the essential link between WCI and Stover is ex-

ucts. Their attempt to distinguish between the products does not establish that gift boxed chocolates or boxed chocolates constitutes a submarket within the general confectionery market. Mr. McNulty testified that promotional boxed chocolates were largely created at the behest of retailers. Whitman's Sampler, Whitman's top volume seller, often sold at retail for $ 3.99, indicating that it was used as a promotional boxed chocolate, selling to the consumer at a loss to the retailer (referred to in the testimony as a "loss leader"). The evidence indicates that gift boxed chocolates and promotional boxed chocolates, although potentially distinct products, compete in the same product market due to the fluidity between the two. This fluidity is evidenced by Mr. McNulty's testimony that the Whitman's Sampler is viewed by some as a promotional boxed chocolate and by testimony that the retailer determines whether a boxed chocolate is a gift boxed chocolate or a promotional boxed chocolate. The relevant product market, however, is not limited to the combination of the gift boxed chocolates and promotional boxed chocolates markets. A large variety of products compete with boxed chocolates. [*32] In fact, Mr. Shoemaker admitted on cross-examination that other items, including such items as boxed fudge, peanut brittle, and nutclusters, compete with boxed chocolates for sales. Plaintiff's difficulty in delineating the relevant product market is understandable in light of the wide variety of product substitutes and consumer outlets for the purchase of those products. Plaintiff has failed to show that it will likely prove at trial that the relevant product market is limited to gift boxed chocolates or even boxed chocolates. Without a clear showing of the relevant market, plaintiff is not entitled to the requested preliminary relief. Likely Effect On Market Competition Plaintiff must show that it will likely succeed in proving that the acquisition of Whitman's assets by WCI may substantially lessen competition in the relevant market. Although plaintiff has failed to show that gift boxed chocolates or boxed chocolates is the relevant market, I will assume for purposes of discussing the likely effect on competition that the relevant product market is the broader boxed chocolate market. It is unclear from plaintiff's evidence just what effect WCI's purchase of Whitman's may [*33] have on competition in the relevant market. Whitman's and Stover compete most heavily against each other in selling to mass merchandisers and chain drugstores. Plaintiff urges the court to consider the potential effect of the acquisition on the competition in those two channels of distribution only, virtually eliminating all other significant competition in the boxed chocolates market, including Godiva, See's, Fannie Mae, Fannie Farmer, Hallmark, and
many other manufacturers who distribute boxed chocolates through department stores, manufacturer's retail stores, specialty candy stores, local drugstores, and other outlets. At the hearing, some of plaintiff's witnesses considered the relevant product market to exclude boxed chocolates, gift or otherwise, that are high-priced or low-priced, leaving only middle-priced boxed chocolates as competition. Arguments factoring quality and price as determining the relevant product market often fail. See, e.g., Murrow Furniture v. Thomasville Furniture, 889 F.2d 524 (4th Cir. 1989). This is so because the definition of the relevant product market as articulated by Brown Shoe Co. "presumes that consumers are [*34] willing to make tradeoffs on some of the very factors the [plaintiff] attempts to use to define [the] market." Murrow Furniture, 889 F.2d at 528. Where the antitrust plaintiff articulates product differences along a spectrum of price and quality, the product market distinctions are economically meaningless, see Murrow Furniture, 889 F.2d at 528, and unrealistic. See Brown Shoe Co., 370 U.S. at 326. However, the price and quality distinctions are relevant in analyzing the effect WCI's acquisition of Whitman's will likely have on competition. See Brown Shoe Co., 370 U.S. at 326 (taking the distinctions into account for purposes of discerning the likely effect of a merger). Dr. Stanton testified as to Stover's potential marketing strategy involving differing price-points. Relating this case to his own experience, Dr. Stanton stated that Stover could block out a price range for its products by utilizing Whitman's to block competitors at the lower price and quality range from entering the middle price range. Stover could keep its boxed chocolate products at the upper [*35] end of the middle price range and could, through WCI, price Whitman's boxed chocolate products in the lower price range. Products competing with Whitman's boxed chocolate products would be unable to raise their prices to the middle range above Whitman's prices, thus, effectively blocking out several "price-points" from the competition. This two-tiered pricing scenario aimed at keeping new entrants out of the middle-tier is purely speculative and does not make sound economic sense. The technique seems slightly unrealistic at best, and at worst could prove disastrous for Stover. Assuming Whitman's and Stover's products compete, Stover would stand to lose substantial sales in implementing this technique. If Whitman's and Stover do not compete, WCI's purchase of Whitman's assets will not greatly impact Stover's market power; Whitman's Sampler, the highest volume seller of Whitman's, currently sells quite often below the manufacturer's price to the retailer; Stover, which manufactures more than one type of boxed chocolate, could

implement the scheme without WCI's acquisition of Whitman's; and the evidence indicates that WCI intends to revitalize Whitman's products, such as the famous Whitman's [*36] Sampler. If this marketing technique was successfully implemented in a different product market as illustrated by Dr. Stanton, it may have been because the product utilized to block entrants from the middle-price tier was not in competition with the higher priced product. Dr. Stanton testified that the higher-priced product was developed to replace the lower-priced one, indicating that the lower-priced product may not have been a substitute for the newer product. Even if I were to narrow the market so drastically, as plaintiff urges me to do, it remains unclear just what effect this would have on competition within mass merchandisers and chain drugstores channels of distribution. Plaintiff's witnesses portrayed the mass merchandisers and chain drugstores as having considerable control over manufacturers of boxed chocolates and other confectionery products. Dr. Stanton's testimony concerning slotting allowances and goodbye money, and his description of retailers as being shelf space realtors, would seem to characterize manufacturers as the customers who purchase and consume retail shelf space, rather than characterizing retailers as the direct customers of manufacturers such as Whitman's [*37] and Stover. Dr. Stanton's description of retailers' substantial control of shelf space and testimony as to the great demand of potential competitors in these channels of distribution for such shelf space, if accurate, would seem to obviate the effects of any attempted anticompetitive behavior on the part of Stover. Existing Competition In The Market The evidence established that in the confectionery industry competition is heavy. In the middle tier pricing level Stover and Whitman's are the major players on a national level selling to mass marketers and chain drugstores. However, there are strong regional players. For example, plaintiff's evidence showed that, on the West Coast, See's is a tough competitor in the boxed chocolate market, 8 although they do not compete in the mass marketers and chain drugstores because See's primary chain of distribution is its own retail outlet stores. Plaintiff's witness, Thomas McNulty, a former Vice President of Sales for Whitman's, considered the Candy Cupboard brand of boxed chocolates by NECCO as a regional competitor of Whitman's but, citing confidentiality concerns, he did not provide any statistics as to the strength of its competition. [*38] Further, testimony of plaintiff's witnesses portrayed the retail drugstore chains and mass marketers as having significant power in determining which manufacturers will be allowed to stock the retailer's shelves. Chain drugstore buyers and buyers for
the mass marketers are bombarded with calls from candy manufacturers of all kinds who would like to have their products sold on and who compete for those retailer's shelf slots or spaces. In effect, Mr. McNulty testified that if a chain drugstore or mass merchandiser approached NECCO for national distribution of Candy Cupboard, that company would jump at the opportunity to supply boxed chocolates to it. The evidence is quite clear that other large regional confectionery manufacturers are seeking opportunities to place their products in chain drugstore and mass merchandiser outlets. 8 There is evidence that See's total annual sales volume is approximately 150 million, which if true, exceeds Whitman's. Market Share Information Accurate information on the respective [*39] market share of boxed chocolate manufacturers is scarce. Jay Shoemaker, Thomas McNulty, and Dr. Stanton all testified that the tracking data in the industry is very poor and difficult, if not impossible, to obtain. At argument, defendants asserted that in order to succeed on a claim alleging that the WCI acquisition of Whitman's may substantially lessen competition, plaintiff must produce hard evidence of market share. Although hard evidence of market share certainly would aid the finder of fact, accepting defendants' argument would permit an industry to shield itself from liability under section 7 of the Clayton Act by poorly tracking, collecting, or assessing data as to market share among competitors. The availability of hard data must be taken into consideration before holding plaintiff responsible for failure to present that data. Proof of market share may be made by introducing evidence of the best available data. At least for present purposes, the evidence of market share need not be perfectly precise, provided it is sufficient for drawing reasonable conclusions. In order to grant plaintiff effective relief, I would have to mandatorily enjoin WCI to divest itself of Whitman's [*40] assets. At a minimum, plaintiff must introduce market share data for the relevant product market that is admissible against WCI in order to be entitled to the requested relief. Unfortunately, because the market share evidence introduced at the hearing was inconclusive and largely unreliable, and as noted, the majority of that evidence is inadmissible against WCI and Stover, plaintiff has failed to show a likelihood of success on the merits. Plaintiff relies in part on Whitman's estimates of its share of the boxed chocolate market sold through certain channels of distribution as provided in the Lazard Memorandum. (P-8). Counsel for defendants Stover and WCI appropriately objected to admission of the Lazard Mem-

orandum and Whitman's Marketing Report for 1992-1993 (P-19) as evidence against Stover and WCI because the purported estimates were solely that of Whitman's. The objection was sustained. The information in that memorandum, testimony based on that information, and testimony as to other statements made on behalf of Whitman's, is not admissible against Stover and WCI. Dr. Stanton's testimony as to the relative strengths of Stover and Whitman's was based on information inadmissible [*41] against WCI and Stover. Mr. McNulty's testimony as to the relative market strengths of Stover and Whitman's, although based on independent data, limited the market to branded gift boxed chocolates sold nationally through mass merchandisers and chain drugstores. 9 The extremely narrow market for which Mr. McNulty provided figures does not substantially aid in determining the post acquisition market power Stover, through WCI, will possess even as to boxed chocolates in general. 10 9 Such narrowing of the relevant product market has been referred to as describing the proverbial "strange red-haired, bearded, one-eyed man-with-a-limp." City of Detroit v. Grinnell Corp., 495 F.2d 448, 457 n.4 (2d Cir. 1974) (quoting United States v. Grinnell, 384 U.S. 563, at 591 (1966) (Fortas, J., dissenting)). 10 Mr. McNulty estimated that for sales of branded gift boxed chocolates sold through mass merchandisers and chain drugstores Whitman's accounted for approximately 15-20% and Stover's accounted for 50%. [*42] For antitrust purposes, Pennsylvania imports too much weight to the product differentiation indicated in the Lazard Memorandum. "Market share" information provided in the Lazard Memorandum, when taken in the context of the entire memorandum is inconclusive and not wholly reliable for the purposes for which Pennsylvania seeks to utilize it. Further, the information is inadmissible against Stover and WCI. It is admissible against Pet because it is a document prepared by Pet's agent, Lazard, with the assistance of Pet. Stover and WCI have never adopted nor acknowledged the Lazard Memorandum as accurate and the document was not otherwise authenticated. According to the Lazard Memorandum, as to boxed chocolates, Whitman's competes with Stover nationally, and in various regional areas throughout the United States with regional manufacturers in distribution to chain drugstores and mass merchandisers, and also competes with boxed chocolates sold through other outlets and for other end-markets. To exclude the effect of this competition, Pennsylvania attempted to severely restrict the definition of the relevant product market.
Little market share information was submitted that was admissible [*43] against WCI and Stover. No market share information was submitted which would include the substitutes mentioned by Mr. Shoemaker as competing with boxed chocolates. Without this information it is impossible to determine exactly how WCI's acquisition of Whitman's may affect the relevant market. Thus, plaintiff's assertion of the concentration in the market has not been established by the admissible and relevant evidence. Plaintiff asserts that market concentration should be calculated with reference to the Herfindahl-Hirschmann Index (HHI). Plaintiff did not introduce into evidence the application of the HHI. Moreover, in order to utilize the HHI to support its case, plaintiff must establish the relevant market and then must provide reliable data establishing the market share of the participants in that market. 11 11 The relevant market must be correctly defined, "if not, the HHI's computed are meaningless and do not reflect market reality." F.T.C. v. PPG Industries, Inc., 255 U.S. App. D.C. 69, 798 F.2d 1500, 1503 (D.C. Cir. 1986). [*44] Barriers to Entry Once plaintiff makes out a prima facie showing that the acquisition may likely substantially lessen competition, defendant can rebut the evidence by showing that the barriers to entry are not significant. See United States v. Baker Hughes, Inc., 285 U.S. App. D.C. 222, 908 F.2d 981, 984 (D.C. Cir. 1990). If I were to determine that plaintiff's would likely prove that branded gift boxed chocolates sold through mass merchandisers and chain drugstores is the relevant market, then, accepting Mr. McNulty's figures, acquisition by WCI, presumably controlled by Stover, of Whitman's could presumptively violate antitrust law. See United States v. Philadelphia National Bank, 374 U.S. 321 (1963). However, the barriers to entry in even that market are not significant. Plaintiff's witness, David Ganong, President of Ganong Bros. Limited, a Canadian manufacturer of packaged chocolates, provided in his sworn statement that his company has "found it difficult to penetrate the market positioning held by Russell Stover and Whitman, due to very strong market power, the strength of the two brands and strong trade contacts and historic sales [*45] relationships by both companies." (P-unmarked, Ganong Aff.). Mr. Shoemaker, Mr. McNulty, and Dr. Stanton testified that significant barriers exist to entry into the market on a national level. Those barriers, according to the testimony, were essentially brand equity, name recognition, and the substantial monetary investment required.

Although plaintiff's witnesses made blanket statements as to significant barriers to entry, other statements made by those same witnesses tended to show that as to certain manufacturers those barriers are not significant. Mr. Shoemaker, Mr. McNulty and Dr. Stanton admitted that Hershey's, Mar's and Nestle's, referred to as the "big three," had the power and manufacturing resources to enter even the assertedly narrow market of gift boxed chocolates sold nationally through chain drugstores and mass marketers. Mr. McNulty testified that his company, NECCO, as a regional competitor, would be ready, willing and able to supply boxed chocolates for chain drugstores and mass marketers nationally. 12 If the company Mr. McNulty works for is representative, other similarly situated regional competitors (and there are many) are ready, willing, and able to enter [*46] the market. Contrary to plaintiff's assertions, the sum of the testimony supports a finding that the barriers to entry in the boxed chocolate market are not significant. 12 Candy Cupboard Masterpieces, a boxed chocolate manufactured by NECCO, is already distributed nationally through K-Mart. Harm to the General Economy of Pennsylvania Even if plaintiff had met its burden of showing a likelihood of success on the merits, it has failed to show irreparable harm that will occur if the preliminary injunction is not granted. The sale of Whitman's assets to WCI has taken place, and Pennsylvania seeks to change the status quo in seeking mandatory divestiture by WCI. 13 The imminent closing of the Whitman's plant in Philadelphia, Pennsylvania, will certainly affect the surrounding community. I am aware and concerned about the impact the closing will have on the employees of Whitman's and their families. Although I recognize the likely detrimental effect of the plant closing, it is clear that any potential "anticompetitive [*47] effect" of WCI's acquisition cannot be causally linked to the plant closing. Unfortunately, the antitrust laws are not designed to prevent the effects likely to occur after Whitman's ceases operations in Philadelphia. The evidence does not establish that the plant closing by Pet will have any anticompetitive effect on the sale of boxed chocolates or that Pet's sale of Whitman's assets to WCI as opposed to some other hypothetically interested entity can be considered the cause of the plant closing. Nothing in the Clayton Act or other federal antitrust laws addresses Pennsylvania's concern about the plant closing. 13 Although originally requested in the complaint's prayer for relief, (Complaint, at 10, P 28(e)), plaintiff concedes that this court could not order Pet to continue manufacturing Whitman's at the Philadelphia plant.
Plaintiff brought this parens patriae action to protect its quasi-sovereign interest in the general economy of the Commonwealth of Pennsylvania from harm caused by a violation of federal [*48] antitrust law. Other than stating that WCI's acquisition will harm Pennsylvania's general economy, plaintiff has not articulated how the alleged antitrust violation will harm its quasi-sovereign interest in Pennsylvania's general economy. At this stage of the litigation, it is difficult to discern from plaintiff's evidence how Pennsylvania's general economy will suffer from the violation alleged by plaintiff. The evidence produced at the preliminary injunction hearing does not establish that Pennsylvania consumers will pay more for gift or promotional boxed chocolates or that as a result of the acquisition, Stover, in exerting increased power, will drive local chocolatiers out of business. The evidence does not show that Pennsylvania retailers will suffer from anticompetitive behavior on the part of Stover. Plaintiff's witnesses readily admitted the variety of outlets for purchasing boxed chocolates and a substantial variety of manufacturers of boxed chocolates. The retailers have scare shelf space and a variety of manufacturers willing to stock their shelves with boxed chocolates. In fact, certain Pennsylvania confectionery manufacturers such as Asher's may benefit if Stover attempts [*49] to raise prices for boxed chocolates it sells to chain drugstores and mass merchandisers. If Stover attempts to raise prices it will invite retailers to take advantage of their control over scarce shelf space and provide access for local and regional candy manufacturers to the retailers' channels of distribution. Because of my conclusion that plaintiff failed to show a likelihood of success on the merits, I need not consider a balancing of the equities as to the harm that a grant or denial of the preliminary injunction will cause to the parties or the public. Due to the imminent plant closing, which is of major concern to the public and all parties, this memorandum opinion was prepared without transcription of notes of testimony and is not as detailed in findings of fact and conclusions of law as would ordinarily be provided absent extreme time constraints. To the extent the foregoing "Discussion" contains findings of fact or conclusions of law not specifically set forth under the sections entitled "Findings of Fact" and/or "Conclusions of Law," the same shall be deemed as additional findings of fact and/or conclusions of law. III. Conclusions of Law 1. Civil Action 93-1972 [*50] is an action brought by the Commonwealth of Pennsylvania, parens patriae, seeking injunctive relief under federal antitrust law. 2. The court has jurisdiction over the subject-matter and the parties. 3. Pennsylvania has standing to bring this action.

4. Pennsylvania failed to prove that it will likely succeed on the merits. 5.. Pennsylvania failed to show that it will likely establish that the relevant market for antitrust purposes is branded gift boxed chocolates sold nationally at chain drugstores and mass merchandisers. Plaintiff further failed to show that boxed chocolates is the relevant market. 6. Pennsylvania failed to show that it will prove WCI's acquisition of Whitman's may substantially lessen competition in a relevant market. 7. Pennsylvania failed to prove it will suffer irreparable harm to its general economy if the preliminary injunction is not granted. 8. Pennsylvania is not entitled to a preliminary injunction ordering WCI and Stover to divest Whitman's
assets purchased from Pet, and ordering further that Pet not transfer any remaining assets of Whitman's to WCI or Stover, or any other preliminary relief. An appropriate order follows. ORDER For the reasons [*51] set forth in the accompanying memorandum opinion, containing findings of fact, conclusions of law, and a discussion of the issues relating to plaintiff's motion for a preliminary injunction, plaintiff's motion is DENIED. Defendants' motion to dismiss for lack of standing, (filed Doc. No. 12), is likewise DENIED. BY THE COURT: Donald W. VanArtsdalen, S.J. May 6, 1993
EXHIBIT A
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NATURE OF THE ACTION 3. This is a civil action for declaratory and injunctive relief arising under various
provisions of the United States Constitution. This case concerns the constitutionality of the Institution of Higher Education Consent Decree Endowment Act, enacted by Pennsylvania on February 20, 2013, and codified as the Act of February 20, 2013, Act No. 1 of 2013. (Act) (Attached as amended and passed by the General Assembly as Exhibit A). 4. Plaintiff complains that the Act is unconstitutional in that it violates Article I,
Section 10 of the United States Constitution, which provides that No State shall make any Law impairing the Obligation of Contracts. 5. Plaintiff also complains that the Act is unconstitutional in that it violates the
Takings Clause of the Fifth Amendment to the United States Constitution, which provides nor shall private property be taken for public use, without just compensation. 6. Plaintiff also complains that the Act is unconstitutional in that it violates Article I,
Section 8 of the United States Constitution, which provides that The Congress shall have Power To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes. 7. Plaintiff seeks declaratory relief pursuant to 28 U.S.C. 2201-02, the
Declaratory Judgment Act, declaring unlawful the Pennsylvania Institution of Higher Education Consent Decree Endowment Act. Plaintiff also seeks injunctive relief pursuant to 42 U.S.C. 1983, restraining Defendants from enforcing the Act against it. JURISDICTION AND VENUE 8. This Court has jurisdiction over this action under 28 U.S.C. 1331, which confers
original jurisdiction to federal district courts over actions arising under the Constitution or laws of the United States. 2
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9.
Venue is proper under 28 U.S.C. 1391(b)(1), because all Defendants are
residents of the Commonwealth of Pennsylvania, and one or more of the Defendants resides and transacts official business in this District. PARTIES 10. Plaintiff NCAA is a voluntary, unincorporated, national association of higher
education institutions, with headquarters in Indianapolis, Indiana. The NCAA seeks to govern intercollegiate athletic competition in a fair, safe, equitable and sportsmanlike manner, to promulgate and enforce uniform rules for the administration of intercollegiate athletics, and to integrate intercollegiate athletics into higher education so that the educational experience of the student-athlete is paramount. 11. Defendant Thomas W. Corbett, Jr. is the Governor of the Commonwealth of
Pennsylvania, and is sued in his official capacity. The Governor is directed to take care to enforce the laws of the Commonwealth. 12. Defendant Rob McCord is the Treasurer of the Commonwealth of Pennsylvania,
and is sued in his official capacity. Under the Act, Mr. McCord is directed to invest and serve as custodian of money secured pursuant to the Act. Act, 3(b)(1). 13. Defendant Mark R. Zimmer is the Chairman of the Pennsylvania Commission on
Crime and Delinquency, and is sued in his official capacity. Under the Act, the Commission is directed to expend money secured under the Act within [the] Commonwealth for the benefit of the residents of [the] Commonwealth. Act, 3(b)(4). 14. Defendant Eugene DePasquale is the Auditor General of the Commonwealth of
Pennsylvania, and is sued in his official capacity. Mr. DePasquale is empowered by Pennsylvania law to review expenditures made by Penn State. 3
RELEVANT FACTS Pennsylvanias Relationship with Penn State University 15. The Supreme Court of Pennsylvania has explained that the relationship between
Penn State and the Commonwealth has evolved over time, resulting in the fact that the Universitys principal means of support are no longer state and federal funds but private and federal funds. Pa. State Univ. v. Cnty. of Centre, 532 Pa. 142, 149, 615 A.2d 303, 306-07 (1992). 16. Upon information and belief, Penn States Operating Budget for 2012-2013 is
approximately $4.3 billion. 17. Upon information and belief, in 2012-2013, state appropriations accounted for a
small portion of Penn States incoming revenue. 18. The Supreme Court of Pennsylvania has held that authority to dispose of
University property is not within the purview of the Commonwealth, and that Penn State exhibits characteristics of a nonprofit corporation chartered for educational purposesnot an agency of the Commonwealth. Pa. State Univ., 532 Pa. at 149, 615 A.2d at 307. 19. Upon information and belief, no state appropriations are used to support
Intercollegiate Athletics, including the football team. The football program at Penn State generates revenue and profit sufficient to fund its entire program as well as most, if not all, other Penn State athletic programs. 20. Upon information and belief, in 2011-2012, the Penn State football team
generated $50,223,498 of income to Penn State, but only $17,205,605 of expenses. The football team produced a profit to Penn State of $33,017,893. Penn State Universitys Membership in the NCAA 21. Penn State has been a member of the NCAA since 1908. 4
22.
By virtue of its active membership in the NCAA, Penn State has the right to
compete in NCAA championships, to vote on legislation and other issues before the Association, and to enjoy other privileges of membership designated in the constitution and bylaws of the Association. NCAA 2012-13 Division I Manual art. 3.02.3.1. 23. All members of the NCAA accept and observe the principles set forth in the
constitution and bylaws of the Association. Id. art. 3.1.1. 24. Article 2.1 of the NCAA Constitution provides that it is the responsibility of
each member institution to control its intercollegiate athletics program in compliance with the rules and regulations of the Association. Id. art. 2.1.1. 25. NCAA bylaws explain that [f]or intercollegiate athletics to promote the character
development of participants, to enhance the integrity of higher education and to promote civility in society, student-athletes, coaches, and all others associated with these athletics programs and events should adhere to such fundamental values as respect, fairness, civility, honesty and responsibility. These values should be manifest not only in athletics participation, but also in the broad spectrum of activities affecting the athletics program. Id. art. 2.4. 26. The NCAAs bylaws also require Exemplary Conduct from coaches and
administrators. Id. art. 19.01.2. Such persons are, in the final analysis, teachers of young people and [t]heir own moral values must be so certain and positive that those younger and more pliable will be influenced by a fine example. Much more is expected of them than of the less critically placed citizen. Id. 27. The NCAAs member schools also have charged the NCAA [t]o uphold the
principle of institutional control of, and responsibility for, all intercollegiate sports. Id. art. 1.2(b).
28.
Members agree that a member institution that commits a major violation of the
NCAA Constitution or Bylaws shall receive a severe penalty, which may include, inter alia, [p]rohibition against specified competition in [a] sport, id. art. 19.5.2(g), or a [f]inancial penalty, id. art. 19.5.2(i). Sexual Abuse Involving Penn State Defensive Coordinator Gerald A. Sandusky and The Freeh Report 29. On November 4, 2011, the Attorney General of the Commonwealth of
Pennsylvania (Attorney General) filed criminal charges against Gerald A. Sandusky (Sandusky) that included multiple counts of involuntary deviate sexual intercourse, aggravated indecent assault, corruption of minors, unlawful contact with minors, and endangering the welfare of minors. 30. Several of the offenses occurred between 1998 and 2002, during which time
Sandusky was either the Defensive Coordinator for the Penn State football team or a Penn State Professor Emeritus with unrestricted access to the Universitys football facilities. 31. The sexual abuse committed by Sandusky occurred in several states, including
Pennsylvania and Texas. 32. Also on November 4, 2011, the Attorney General filed criminal charges against
Penn States Athletic Director and Senior Vice President for Finance and Business for failing to report allegations of child abuse to law enforcement and committing perjury during their testimony to the grand jury. 33. On November 21, 2011, the Special Investigations Task Force of the Board of
Trustees of Penn State University engaged former FBI director and former U.S. District Court Judge Louis J. Freeh to investigate circumstances surrounding the criminal charges and the response of University administrators to abuse allegations made against Sandusky. 6
34. July 12, 2012. 35.
The Report of the Special Investigative Counsel (Freeh Report) was released on
The Freeh Report found that there had been total and consistent disregard by the
most senior leaders at Penn State for the safety and welfare of Sanduskys child victims. Freeh Report at 14. Among those singled out were the then-President of Penn State University, head football coach, and athletic director. 36. The Freeh Report found that Penn States leadersincluding its then-President,
head football coach, and athletic directorhad repeatedly concealed critical facts relating to Sanduskys child abuse from the authorities in order to, inter alia, avoid[] the consequences of bad publicity, and because of [a] culture of reverence for the football program that is ingrained at all levels of the campus community. Id. at 16, 17. The Consent Decree 37. Shortly after the Attorney General of Pennsylvania filed criminal charges against
various Penn State officials, the NCAA began to evaluate potential violations of NCAA rules at Penn State. 38. In part to avoid a prolonged NCAA investigation and NCAA hearings, Penn State
entered into a Consent Decree with the NCAA on July 23, 2012. The Consent Decree (Attached as Exhibit C) constitutes a binding contract between the NCAA and Penn State. 39. For purposes of the Consent Decree and resolving its violations of NCAA rules
and regulations, Penn State accepted the findings of the Freeh Report and agreed that the NCAAs traditional investigative and administrative proceedings would be duplicative and unnecessary. Consent Decree at 1. 40. Instead, Penn State and the NCAA agreed that the Freeh Report, as well as the
record established by Sanduskys criminal trial, permitted fashioning an appropriate remedy for 7
the violations on an expedited timetable, which benefits current and future University students, faculty and staff. Id. at 1. 41. In particular, Penn State communicated to the NCAA that it accepts the findings
of the Freeh Report for purposes of [the Consent Decree] and acknowledges that those facts constitute violations of the [NCAAs] Constitutional and Bylaw principles. Id. at 2. Penn State likewise formally accepted the NCAAs conclusion that Penn State breached the standards expected by and articulated in the NCAA Constitution and Bylaws. Id. at 2. 42. Among other sanctions, the NCAA imposed, and Penn State agreed to pay, a
$60 million fine, equivalent to the approximate average of one years gross revenue from the Penn State football program, to be paid over a five-year period beginning in 2012 into an endowment for programs preventing child sexual abuse and/or assisting the victims of child sexual abuse. Id. at 5. 43. On the day on which the Consent Decree was finalized, the President of Penn
State explained that pursuant to the Consent Decree, [t]he NCAA also mandates that Penn State become a national leader to help victims of child sexual assault and to promote awareness across our nation. Press Release, Penn State, President Ericksons Statement Regarding NCAA Consent Decree (July 23, 2012). 44. Penn State has continued to acknowledge that [a]s part of the consent decree
issued by the NCAA in the wake of child abuse charges against Jerry Sandusky, the NCAA mandated that Penn State become a national leader to help victims of child sexual assault across the nation. Press Release, Penn State, NCAA Task Force Sets Timeline for Endowment Fund (Dec. 7, 2012).
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45.
On or about September 18, 2012, prior to introduction of the Act, the NCAA
appointed a task force to oversee the creation of the endowment funded by the fine required to be paid pursuant to the Consent Decree. The task force members include the Dean of the College of Health and Human development at Penn State and the Vice Dean for Clinical Affairs at the Penn State College of Medicine. Other members were drawn from national nonprofit organizations (some specializing in child advocacy), the federal government, and the NCAA membership. 46. Penn State has explained that [t]he task force will decide how the endowment is
structured, develop philosophies for allocation of funds and create policies for investment and distribution of benefits. Press Release, Penn State, Penn State Sets Aside First Payment of NCAA Fine (Dec. 20, 2012). 47. The Task Force established that [a]ll funds from the fine will follow the
endowment guidelines established by the Child Sexual Abuse Endowment Task Force and flow to programs designed to prevent child sexual abuse or assist the victims of child sexual abuse nationwide. Press Release, NCAA.org, Task Force Members Named to Oversee Penn State Endowment Fund (Sept. 18, 2012). 48. Upon information and belief, Penn State has already paid $12 million into an
account to be transferred to the NCAAs endowment when it is established. 49. Upon information and belief, Penn State has the financial ability to pay the full
$60 million fee without using state-appropriated funds. 50. Penn State has made clear that no state funds will be used for the endowment.
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The Institution of Higher Education Consent Decree Endowment Act 51. On December 28, 2012, State Senator Jake Corman (Senator Corman)
circulated a memorandum to other state senators entitled NCAA Fine Endowment for Pennsylvania. (Attached as Exhibit B). 52. As Senator Cormans memorandum and the Acts provisions make clear, the
obvious and explicit purpose of the Act was to seize the NCAAs Fine and redirect it only to Pennsylvania causes. In his memorandum, Senator Corman explained: [i]n the near future, I plan to introduce legislation to direct funds from penalties placed on Commonwealth supported institutions of higher education to Commonwealth causes. The legislation requires that any institution of higher education that receives state appropriated funds and has received a penalty of $10 million or more from an outside governing body, must establish an endowment that will distribute the funds into the Commonwealth. The memorandum explained, in closing, that [t]his legislation seeks to impact the $60 million financial penalties placed upon the Penn State University. 53. On January 16, 2013, various state senators introduced the Institution of Higher
Education Consent Decree Endowment Act. The Act applies to any institution of higher education, which is defined as [a] postsecondary educational institution in this Commonwealth that receives an annual appropriation from an act of the General Assembly. The Act applies to certain transactions between an institution of higher education and a governing body, defined as [a]n organization or legal entity with which an institution of higher education is associated and which body may impose a monetary penalty against the institution of higher education. 54. As amended and enacted, the Act provides that [i]f an institution of higher
education pays a monetary penalty pursuant to an agreement entered into with a governing body
10
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and: (1) the monetary penalty is at least $10,000,000 in installments over a time period in excess of one year; and (2) the agreement provides that the monetary penalty will be used for a specific purpose, then the monetary penalty shall be deposited into an endowment that complies with the provisions of subsection (b). 55. As enacted, subsection (b) provides that [t]he endowment shall be established as
a separate trust fund in the State Treasury and the State Treasurer shall be custodian thereof. The Act thus provides that money that an institution of higher education is obligated to pay to a private endowment or other third party instead becomes the property of the Commonwealth of Pennsylvania. 56. The Act directs the Pennsylvania Commission on Crime and Delinquency to
expend the money of the endowment. Act, 3(b)(3). The Act does not permit the NCAA, the NCAA Task Force, or any third party chosen by them to direct that the endowments funds be expended upon beneficiaries of their choosing. 57. The Act specifies that [u]nless otherwise expressly stated in the agreement, the
funds may only be used within this Commonwealth for the benefit of the residents of this Commonwealth, and only for certain specified purposes related to sexual abuse. Act, 3(b)(4). The Act thus provides that monies that a governing body intended for use nationwide may only be spent within the Commonwealth to benefit the residents thereof. 58. The Act shall apply to all monetary penalties paid or payable under agreements
between institutions of higher education and governing bodies regardless of the payment date, Act, 5, and shall take effect immediately, Act, 6. 59. On or about January 30, 2013, Senator Corman issued a press release announcing
that [t]he state Senate today unanimously approved legislation which would ensure that all
11
proceeds from Penn States $60 million fine are used to fund programs within Pennsylvania. The finewhich will go into an endowment for programs to prevent child sex abuse or help abuse victimsis one of a number of sanctions imposed on Penn State by the National Collegiate Athletic Association. Press Release, State Senator Jake Corman, Senate Passes Corman Bill to Keep Penn State Fine Money in PA (Jan. 30, 2013). 60. The Act is intended to apply, and the Acts sponsors have indicated it will apply,
to the full $60 million fine that Penn State committed to pay prior to enactment of the Act. 61. The Act is not limited to monetary penalties paid with state funds, but rather it
applies to all monetary penalties paid by an institution of higher educationwhether the funds come from private donations, tuition, revenues generated by athletics, or other sourcesas long as that institution receives any state-appropriated funds. COUNT I (VIOLATION OF THE TAKINGS CLAUSE OF AMENDMENT 5 TO THE UNITED STATES CONSTITUTION) 62. herein. 63. Senator Cormans memorandum of December 28, 2012 and his press release of The foregoing Paragraphs are incorporated by reference as if set forth in full
January 30, 2013 concerning the legislation set out that the purpose of the legislation is to seize and control the $60 million fine that Penn State agreed to pay to the endowment to be created by the NCAA. 64. The Consent Decree established a contractual obligation that Penn State pay the
NCAAs $60 million fine over a five-year period into an endowment to be created by the NCAA.
12
65.
Both parties to the contract publicly acknowledged prior to the introduction or
enactment of the Act that their contractual intent and expectation was for the NCAA to create an endowment to manage the $60 million fine. 66. An express purpose of the Act is to direct funds from penalties placed on
Commonwealth supported institutions of higher education to Commonwealth causes. 67. Pursuant to the Act, the Commonwealth of Pennsylvania is directed to take
possession of the funds when Penn State pays [its] monetary penalty to the NCAAs endowment. 68. Pennsylvania. 69. The Act, by its terms, purports to permanently appropriate to the Pennsylvania Funds paid to the NCAAs endowment are not owned by the Commonwealth of
Treasury the full $60 million fine, even though the contract requires that the penalty be paid into the NCAAs endowment. 70. By directing Pennsylvania officials to collect and take payments to which it is not
entitled, the Act amounts to a taking of private property without just compensation. COUNT II (VIOLATION OF THE CONTRACT CLAUSE, ART. I, SEC. 10 OF THE UNITED STATES CONSTITUTION) 71. herein. 72. Pursuant to the Consent Decree, Penn State accepted the NCAAs conclusion that The foregoing Paragraphs are incorporated by reference as if set forth in full
it breached the standards expected by and set forth in the NCAA Constitution and Bylaws by, inter alia, failing to protect children from a predator because senior leaders of Penn State concealed these activities for over a decade.
13
73.
Pursuant to the Consent Decree, Penn State contractually committed to pay a fine
of $60 million into an endowment for programs preventing child sexual abuse and/or assisting the victims of child sexual abuse. 74. The drafters of the Act made clear that [t]his legislation seeks to impact the
$60 million financial penalties placed upon the Penn State University. 75. The avowed purpose of the Act is to disrupt Penn States contractual promise to
pay the $60 million into the endowment created by the NCAA. 76. The NCAA and Penn State agreed that Penn States fine would be paid into an
endowment that would invest in the most appropriate programs available to prevent and/or assist the victims of sexual abuse, without any geographic restriction. By seizing the funds and restricting eligibility to benefit from the funds only to Pennsylvania programs benefiting only Pennsylvania residents, the Act will defeat the Consent Decrees plain terms and frustrate the parties intended purpose. 77. Upon information and belief, the only penalty affected by the Act is Penn States
contractual promise to pay $60 million into the endowment created by the NCAA. 78. The Act operates as a substantial impairment of Penn States contractual promise
to pay $60 million into the endowment created by the NCAA. 79. Pennsylvania has advanced no permissible justification for abridging Penn States
contractual agreement with the NCAA. COUNT III (VIOLATION OF THE COMMERCE CLAUSE, ART. I, SEC. 8 OF THE UNITED STATES CONSTITUTION) 80. herein. The foregoing Paragraphs are incorporated by reference as if set forth in full
14
81.
Under the Consent Decree, Penn State committed to pay the $60 million fine
levied by the NCAA to an endowment established by the NCAA. 82. The NCAA-established endowments stated purpose is to prevent child sexual
abuse or assist the victims of child sexual abuse nationwide. 83. The Act expressly provides, however, that the funds may only be used within
this Commonwealth for the benefit of the residents of this Commonwealth. 84. The Act, by its terms, provides that money owned by a private endowment and
intended for use nationwide may only be used within the borders of one State. 85. The Act, by its terms, provides that money intended to benefit individuals
nationwide may only be used to benefit the residents of one State. 86. 87. The Act, by its terms, discriminates against interstate commerce. The Act purports to regulate out-of-state transactions by out-of-state entities, such
as the NCAA, the NCAAs Task Force, and the NCAA-established endowment. The Act therefore amounts to an impermissible extraterritorial regulation of commerce. PRAYER FOR RELIEF WHEREFORE, Plaintiff requests that this Court grant the following relief: (1) (2) (3) (4) A declaration that the Act is unconstitutional; An injunction against enforcement of the Act; Attorneys fees costs; and Such other and further relief as this Court deems just and proper.
15
Dated: February 20, 2013 OF COUNSEL, PHV to be requested: Everett C. Johnson, Jr. (DC No. 358446) J. Scott Ballenger (DC No. 465252) LATHAM & WATKINS LLP 555 Eleventh Street NW Suite 1000 Washington, D.C. 20004-1304 Telephone: (202) 637-2200 Email: everett.johnson@lw.com
Respectfully submitted, /s/ Thomas W. Scott Thomas W. Scott (PA No. 15681) KILLIAN & GEPHART, LLP 218 Pine Street P.O. Box 886 Harrisburg, PA 17108-0886 Telephone: (717) 232-1851 Email: tscott@killiangephart.com
Attorneys for Plaintiff National Collegiate Athletic Association
16
UNITED STATES DISTRICT COURT MIDDLE DISTRICT OF PENNSYLVANIA COMMONWEALTH OF PENNSYLVANIA, : THOMAS W. CORBETT, JR., GOVERNOR, : : : Plaintiff, : : v. : : : NATIONAL COLLEGIATE ATHLETIC : : ASSOCIATION, : : Defendant. : : : ORDER AND NOW, this _____ day of ______________, 2013, upon consideration of the Defendants Motion to Dismiss the Complaint, and the Plaintiffs Opposition thereto, IT IS HEREBY ORDERED that Defendants Motion is DENIED. BY THE COURT: ELECTRONICALLY FILED
Civil Action No.: 1:13- cv00006-YK
(THE HONORABLE YVETTE KANE)
____________________________________ Chief Judge Yvette Kane

Corbett v. NCAA

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Civil Action No.: 1:13- cv00006-YK

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The cases cited by the NCAA are inapposite.

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DATED: February 25, 2013

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BY THE COURT: /s/ Michael M. Baylson Michael M. Baylson, U.S.D.J.

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A. I'm employed by Whitman's Candies, Inc. [WCI].

Q. You resigned from Russell Stover?

Q. When you say "we," do you mean Russell Stover?

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Venue is proper under 28 U.S.C. 1391(b)(1), because all Defendants are

34. July 12, 2012. 35.

Both parties to the contract publicly acknowledged prior to the introduction or