Wednesday, April 25, 2012

Condom Maker’s Shelf Agreements with Retailers Not a Barrier to Competition

This posting was written by E. Darius Sturmer, Editor of CCH Trade Regulation Reporter.

The manufacturer of Trojan condoms did not engage in exclusive dealing, monopolization, attempted monopolization, or a conspiracy to monopolize by entering into "planogram" shelf-space agreements with large chain retailers or by allegedly abusing a "category captain" position granted to it by some retailers, the federal district court in San Francisco has decided.

A complaining niche competitor failed to raise a genuine issue of material fact as to whether the agreements substantially foreclosed competition in the relevant market for male condoms sold to retailers. The competitor’s antitrust claims were therefore dismissed.

Under the planogram agreements, the manufacturer offered the retailers a percentage rebate off its wholesale price in exchange for the retailer’s commitment to devote a certain percentage of the condom shelf space to the manufacturer’s products. "Category captain" described a position to which the manufacturer was appointed by some retailers in order to assist with shelf space allocations and to give advice on how best to present the category.

Market Power

The complaining competitor failed to provide direct or circumstantial evidence that the defendant possessed market power over the relevant market, the court held at the outset. The competitor, whose market share never surpassed one-half of one percent throughout the relevant period, offered no evidence of restricted output or supra-competitive prices.

Although the defending manufacturer clearly held a dominant share—over 75 percent—of the relevant market, the complaining competitor could not demonstrate that there were significant barriers to entry into that market or that existing competitors lacked the capacity to increase their output in the short run. The rebate program at issue in the suit did not constitute a substantial barrier to entry. It was undisputed that just three major players had long dominated the condom market, and that while small players like the plaintiff had entered the market, none had seriously challenged the big three recently.

The market structure indicated that a combination of factors might have prevented the market from self-correcting in the face of anticompetitive conduct, the court stated. Even assuming significant barriers to entry, the competitor failed to produce any evidence, or even argument, as to whether existing competitors lacked the capacity to increase their output in the short run.

Market Foreclosure

The planogram program did not force retailers to give any specified amount of shelf space to the defending manufacturer over its rivals, the court observed. In addition, retailers could terminate their already-short contract agreements at any time, for any reason, with minimal enough notice to substantially negate the risk of foreclosure effects. The terminability of the contracts rendered them presumptively lawful, the court noted. Finally, the rebate program left open existing and potential alternative channels of distribution to the manufacturer’s competitors.

The program was not shown to be coercive in practice any more than in theory, the court explained. A significant number of large retailers did not participate. Even those who did were not clustered at the bottom tier of the rebate structure in the manner that the plaintiffs’ theory of coercive effect suggested they would be. The record contained qualitative evidence that retailers could, and did, reduce or eliminate their participation in the planogram program based on market forces.

Further, evidence indicated that the manufacturer’s share of sales at non-participating retailers was roughly on par with its sales at participating retailers, its shelf share system-wide seldom exceeded its market share, and its two primary competitors apparently avoided any purported anticompetitive effect of the planogram program.

The complaining company’s own competitive misfortunes had myriad causes other than the defending manufacturer’s alleged exclusionary conduct, the court explained. Moreover, even if a coercive effect had been demonstrated, there was still no evidence that competition was foreclosed from a substantial portion of the market.

Exclusionary Conduct?

The Trojan maker’s "planogram" agreements and "category captain" conduct did not amount to sufficiently exclusionary conduct to support claims of unlawful monopolization, attempted monopolization, or monopolization conspiracy, the court declared. The complaining competitor provided no evidence as to how often the manufacturer’s recommendations were adopted or whether they had the intent and/or effect of sabotaging the competitor. Undisputed evidence in the record indicated that it was commonplace in the industry for manufacturers to suggest planogram designs or provide retailers with other information to advocate for their brands, and even the complaining competitor had engaged in certain advocacy tactics in an attempt to influence retailer decisions.

The fact that the defending manufacturer was successful in achieving a degree of cooperation with retailers did not, without more, establish anticompetitive conduct. Without a showing of exclusionary conduct, no reasonable inference could be made of either general or specific intent to monopolize to support either a claim of completed or attempted monopolization, the court reasoned.

Antitrust Injury

The defending manufacturer also would not have caused a cognizable antitrust injury through the alleged conduct, the court added. While the complaining competitor sufficiently alleged harm to itself and to other small manufacturers, it failed to show that its losses were the result of the defending manufacturer’s alleged anticompetitive acts as opposed to other market forces, and further failed to demonstrate harm to competition. It offered no explanation for why other larger rivals in the industry managed to compete with the defendant despite the alleged misconduct.

The decision is Church & Dwight Co., Inc v. Mayer Laboratories, Inc., 2012-1 Trade Cases ¶77,863.

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