Monopolization Scheme to Manipulate Crude Oil Market Adequately Alleged

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

The federal district court in New York City has refused to dismiss monopoly claims against related entities that traded in physical and futures contracts for crude oil, including West Texas Intermediate grade (WTI) crude oil, for manipulating futures prices (In re Crude Oil Commodity Futures Litigation, December 21, 2012, Pauley, W.).

Individuals and corporate entities that traded NYMEX WTI futures contracts—agreements for the purchase or sale of WTI on a fixed date in the future in Cushing, Oklahoma—and calendar spreads in 2008 adequately alleged a “complex price manipulation and monopolization scheme” to profit from tightness in WTI supply in Cushing during that period. Commodities Exchange Act claims also were sufficiently alleged.

Monopoly Power

The plaintiffs adequately alleged the possession of monopoly power through direct evidence of the defendants' ability to control prices and by defining a relevant market to demonstrate excess market share. The plaintiffs offered as direct evidence the abrupt shifts in the market, which happened only twice between January 2006 and January 2011 when the defendants allegedly dumped their accumulated WTI supply as part of the manipulation scheme. The defendants offered extrinsic evidence and fact-based arguments to refute the plaintiffs' allegations of market power. However, the court ruled that reliance on extrinsic evidence was premature.

The defendants also argued that the market was improperly defined because it contained inconsistencies, should have not been limited geographically to Cushing, and should have included alternate grades of crude oil that were acceptable substitutes for WTI. According to the court, the plaintiffs' relevant market was not so implausible as to warrant dismissal, especially where they pleaded the defendants' ability to control prices.

In addition, the defendants attempted to refute monopoly power by arguing that their alleged ability to control prices was short-term and sporadic. They argued that monopoly power is not actionable unless it causes a structural alteration of the market, or is of a certain temporal duration. While the duration of a monopoly may be "one measure" in determining whether a defendant possessed monopoly power, it is not dispositive.

“[C]ourts have recognized the potential for monopolization of month-long commodities markets in factually similar actions,” the court noted. “[A] month-long monopolization could be of sufficient duration to cause anti-competitive effects.”

The plaintiffs also adequately alleged the willful acquisition of monopoly power, the court held. Rejected were the defendants' assertions that the complaint offered only conclusory allegations. The complaint described a willful scheme in which the defendants acquired a dominant position in physical WTI for the purpose of manipulating the prices of WTI derivatives. The defendants allegedly acquired a dominant share of physical WTI despite having no commercial need for it, only to sell it at an uneconomic time. This supported an inference of anticompetitive conduct.

The court did not dismiss attempted monopolization and conspiracy to monopolize claims, even though the plaintiffs did not include a recital of each element of these causes of action. The detailed allegations regarding the manipulative scheme were sufficient.

Antitrust Injury

The plaintiffs alleged “a quintessential antitrust injury—losses stemming from artificial prices caused by anticompetitive conduct,” the court also ruled. The plaintiffs alleged losses in the WTI derivatives market, caused by artificial market conditions that were spawned by the defendants' dominant share of the physical WTI market. The defendants argued that the plaintiffs could not establish antitrust injury because they did not trade in the physical market that was allegedly monopolized. However, the defendants cited no authority for the proposition that an antitrust injury cannot extend beyond the bounds of the monopolized market, according to the court.

The case is No. 11 Civ. 3600 (WHP).

Bernard Persky (Labaton Sucharow, LLP) for Stephen E. Ardizzone. Brigitte T. Kocheny (Winston & Strawn LLP) for Parnon Energy, Inc.

Baseball, Hockey Fans Can Pursue Antitrust Claims over Restricted Availability of Game Telecasts

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

Subscribers to Internet services or television services offering live telecasts of “out-of-market” hockey and baseball games adequately alleged separate antitrust conspiracies involving the National Hockey League (NHL) and Major League Baseball (MLB), the federal district court in New York City has ruled (Laumann v. National Hockey League, December 5, 2012, Scheindlin, S.).

These sports fans alleged that, as a result of black-out or noncompete agreements, they were required to purchase all “out-of-market” hockey or baseball games even if they were only interested in viewing a particular game or games of one particular team located outside of their local markets. With the limited exception of nationally televised games, standard cable and satellite TV packages only offered “in-market” games (i.e., games played by the team in whose designated home territory the subscriber resided). A consumer interested in obtaining out-of-market games had two options: (1) television packages—such as NHL Center Ice and MLB Extra Innings—and (2) Internet packages—such as NHL Game Center Live and MLB.tv—which were controlled by the leagues.

The subscribers alleged a conspiracy involving the NHL, MLB, various clubs within the leagues, multichannel video programming distributors (MVPDs)—such cable distributor Comcast and satellite distributor DirecTV—and regional sports networks (RSNs). The RSNs are local television networks that negotiate contracts with individual NHL or MLB clubs to broadcast the majority of the local club’s games within that club’s telecast territory and to sell to the MVPDs. Some of the RSNs are owned by Comcast and DirecTV; however, two are independent of the MVPDs, but share ownership with an individual club. For example, Yankees Entertainment and Sports Networks, LLC is an RSN for New York Yankees that is co-owned with the New York Yankees.

Standing

The defendants challenged the television subscriber plaintiffs’ standing to sue on the grounds that they were indirect purchasers of the product in question and that their injuries were too remote from the alleged conduct. The television subscribers successfully argued that their claims fell within an exception to the Illinois Brick indirect purchaser doctrine, the court ruled. The middlemen were alleged to be co-conspirators.

The court, however, dismissed for lack of standing the plaintiffs who merely subscribed to Comcast and DirecTV, but did not subscribe to an out-of-market sports package. These plaintiffs did not allege that they were prevented from viewing games as a result of the black-out agreements or that they were charged supracompetitive prices for games that they wished to view. Rather, their claims were based on some unidentified increased price of their overall cable package allegedly stemming from the absence of competition from out-of-market baseball clubs and their RSNs. Their alleged injuries were both speculative and difficult to identify and apportion, the court ruled.

Conspiracy Allegations

Finding that at least some of the plaintiffs had standing, the court went on to find that an agreement between the MVPDs and the RSNs and league defendants to restrain trade was adequately alleged. While the plaintiffs did not allege that the MVPDs entered into horizontal agreements, they plausibly alleged vertical agreements that not only facilitated, but also were essential to the horizontal market divisions and the agreement to cede control over out-of-market games to the leagues.

The plaintiffs adequately alleged harm to competition resulting from the market division agreements. The court rejected the defendants' argument that, because the NHL and MLB were legitimate joint ventures and some cooperation with respect to the production of games was necessary, their conduct—the production and distribution of live telecasts of games —was “core activity” immune from antitrust scrutiny. “Making all games available as part of a package, while it may increase output overall, does not, as a matter of law eliminate the harm to competition wrought by preventing the individual teams from competing to sell their games outside their home territories,” the court explained.

In addition, the subscribers to Internet services adequately alleged reduced choice, insofar as in-market games were not available from any seller over the Internet. The Internet packages were available directly through the leagues and also required the purchase of all out-of-market games. Neither local games nor nationally televised games were available through these packages. The alleged purpose of the limitation on Internet programming was to protect the RSNs’ regional monopolies and to insulate MVPDs that carried them from Internet competition, the court explained. As a result, the Sherman Act, Sec. 1 claim could proceed against all defendants.

Monopoly Claims

Lastly, the court refused to dismiss claims against the NHL and MLB for conspiracy to monopolize the markets for video presentations and Internet streaming of major league hockey or baseball games. However, the plaintiffs did not support Sherman Act, Sec. 2 claims against the RSNs or MVPDs in the market for production of baseball and hockey games. Thus, the conspiracy to monopolize claim was dismissed against the RSN and MVPD defendants, but could proceed against the remaining defendants.

Energy Shot Producer’s Distribution of Recall Notice Could Be False Advertising

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

The producer of a two-ounce energy shot drink known as "5-Hour ENERGY" could have engaged in false advertising in violation of Sec. 43(a) of the Lanham Act by distributing a letter, entitled "Legal Notice," to retailers notifying them of a court-ordered recall of a competing "6 Hour" energy shot product, the U.S. Court of Appeals in Cincinnati has decided. Summary judgment in the producer’s favor was reversed as the false advertising claim, although it was affirmed as to a competitor’s monopolization and attempted monopolization claims.

False Advertising

The complaining company, which marketed one of several "6 Hour" energy shots not subject to the recall, offered sufficient evidence to create a genuine dispute as to whether the notice was misleading and tended to deceived its intended audience, the court held. The language of the recall notice "teeter[ed] on the cusp between ambiguity and literal falsity" both descriptively and grammatically. A statement in the contested letters that the 5-Hour maker "won a decision against a "6 Hour" energy shot" was not literally true, as the 5-Hour maker had actually won a decision against a particular "6 Hour" competitor’s use of an overall product image, the court explained.

Moreover, confusion could ensue from the recall notice’s uses of the prefatory words "a" and "any" to refer to a 6 Hour energy shot—incorrectly suggesting that any shot bearing the name 6 Hour was subject to recall. Also problematic was a subsequent use of "the," which implied that there was only one specific product at issue, though the statement as a whole failed to specify exactly what product.

A lower court’s exclusion, on hearsay grounds, of documentary and testimonial evidence from the complaining company, distributors, and brokers showing confusion as to whether 6 Hour POWER had been recalled was erroneous, the appellate court said. Phone calls from retailers to distributors were not relied on to show the content of the conversations, but to show that the conversations occurred and the state of mind of the declarants. That so many people called the complaining company immediately after receiving the notice at the very least raised a genuine issue of material fact as to whether a significant portion of the recipients were misled, in the appellate court’s view.

The defendant’s characterization of the calls as "non-actionable customer inquiries" could be rejected by a jury, in light of testimony that many distributors had called to stop buying the complaining company’s product after the notice was issued, that sales growth for the product dropped significantly, and that the company lost an estimated $3.4 million in sales as a result of the recall notice. All of the calls evidenced a belief that 6 Hour POWER had been recalled; had the called lacked such a mistaken belief, the calls would not have occurred, the court reasoned.

Monopoly, Attempt

The producer of "5-Hour ENERGY" did not engage in monopolization or attempted monopolization in violation of Sec. 2 of the Sherman Act through its actions against the competitor, the court also ruled. The producer allegedly undertook a broad anticompetitive scheme that included: (1) asserting a fraudulently obtained supplemental trademark registration for its product; (2) false advertising in connection with its distribution of the Legal Notice letter to retailers; (3) offering incentives to retailers for superior product placement, (4) requesting that retailers sell its product at the exclusion of other energy shot products, and (5) registering certain Internet domain names similar to the names of a competitor’s product.

Because the complaining competitor specified damages resulting only from the recall notice, only the anticompetitive effects of the recall notice could lead to antitrust liability. However, there could be no harm to competition from the recall notice, even if the notice amounted to false advertising. The complaining competitor was able to—and did—counter that information by sending notices that its product, 6 Hour POWER, had not been recalled.

The decision is Innovation Ventures, LLC, v. N.V.E., Inc., 2012-2 Trade Cases ¶78,053.

Antitrust Claims Against Cable Provider Pared, But Sent to Trial

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

Cable television programming service provider Comcast Corp. could have violated Sec. 1 or Sec. 2 of the Sherman Act by entering into swap agreements with other cable providers in the Philadelphia area and undertaking a course of action to block new entrants into its service areas, the federal district court in Philadelphia has ruled.

The complaining class of subscribers could not establish that Comcast’s swap agreements were illegal per se or that the company’s attempts to restrict access to installation contractors and to a sports network it owned constituted actionable predatory conduct. However, the class did offer enough evidence to support a claim of horizontal market allocation under the rule of reason and monopolization or attempted monopolization based on targeted price discounts to prospective customers of a new entrant into an area it served, in the court’s view. Comcast’s motion for summary judgment against the claims was granted in part and denied in part.

Per Se Illegality

Comcast’s swap agreements did not amount to a per se violation of the Sherman Act because the class failed to meet its summary judgment burden with respect to whether the swap transactions were naked market division agreements, rather than merely ancillary restraints on trade. The class did not create a genuine issue of material fact concerning whether the cable provider had anticompetitive intent in entering into the swap agreements.

Evidence that the company’s executives had a long-standing desire to "rationalize the cable industry" by consolidating positions in certain markets in exchange for giving up positions in other markets did not support the conclusion that the swap agreements were naked restraints of trade so plainly anticompetitive that no elaborate study of the industry was needed to establish their illegality. The ability of cable companies to provide new and advanced services, achieved through clustering their systems, required proof of facts that were substantially different from the classic horizontal price fixing and group boycott conspiracies generally found to be per se antitrust violations, the court said.

Allocation of Customers/Markets

Comcast was not entitled to summary judgment on the Sec. 1 claim outright on the basis that the counterparties to the swap agreements were never actual or potential competitors. For purposes of the subscribers’ Sec. 1 claim, their certification as a class (2012-2 Trade Cases ¶77,575) hinged on whether they could demonstrate that Comcast conspired with competitors to allocate markets, the court noted. The class offered sufficient evidence to create a jury issue on whether Comcast and the counterparties to the swap agreements were actual competitors.

An argument by the company that it and the counterparties were never competitors in the Philadelphia market—even though each offered cable services to subscribers in that market—because they operated cable systems in non-overlapping franchise areas and did not offer services to the same subscribers, at the same time, anywhere in the region was rejected.

Whether or not the franchise areas were overlapping was immaterial because the relevant geographic area was not limited to the individual franchise area. The class did not need to show that the defendant actually competed with the counterparties in the same franchise area. Based upon the proposed market definitions, it was sufficient that each provided cable television programming services in the Philadelphia direct marketing area.

Monopoly Claims

Comcast did not engage in unlawful monopolization or attempted monopolization by creating a Philadelphia area cluster through the use of the swap agreements to allocate the market between it and two competitors, the court found. The conduct may have been predatory, according to the court, but the class failed to show that the purportedly procompetitive justifications Comcast offered for its conduct were pretextual.

Those justifications included the realization of efficiencies in marketing, infrastructure, management, and operations, along with an ability to introduce new products such as high-speed Internet, telephone, high-definition television, and other video features and services. Evidence that it raised prices did not refute the claim of efficiency. The court rejected arguments by the class that Comcast could have achieved the same level of efficiency of clustering by overbuilding its competitors, rather than acquiring them or swapping for their assets, and that it never studied whether it was achieving its goals.

Comcast’s offering of targeted price discounts to subscribers in one county it dominated in order to convince them not to switch service to a competing cable overbuilder that was moving into the area could have violated Sec. 2 of the Act, the court decided. Because of the price freeze in areas the competitor entered, and increased prices in areas it did not, the rates paid by the company’s customers in overbuilt areas were allegedly 18 to 38 percent below the rates paid by its customers in areas where the overbuilder did not offer service. The implications of the disparate pricing policy were clear: but for the overbuilder’s failure to enter the City of Philadelphia, the defending cable provider’s customers in those areas would have enjoyed significantly lower prices.

That Comcast never offered below-cost prices to potential customers of the overbuilder did not mandate a finding that the discount program was not exclusionary conduct. Because it possessed market power, its decision to target promotional discounts to deter a new entrant could be deemed predatory and an exercise of market power to maintain its monopoly. Given that the company made no argument that the discount program had otherwise legitimate business justifications, the claim had to be submitted to a jury, the court concluded.

The decision is Behrend v. Comcast Corp., 2012-1 Trade Cases ¶77,862.

Excluded Radiologist Lacked Antitrust Standing to Sue Hospital, Physician Groups

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

A radiologist who was excluded from two New Jersey hospitals after the hospitals’ operator selected a new exclusive radiology provider lacked antitrust standing to pursue boycott and monopoly claims, the U.S. Court of Appeals in Philadelphia decided earlier this week.

Nearly a decade ago, the radiologist filed his antitrust claims, alleging the hospital operator, its director of radiology, and two radiology physician groups conspired to boycott him in the local radiology market and used illegal tying arrangements to link radiology services to hospital services. He also alleged that exclusive radiology provider contracts were intended to monopolize the outpatient and hospital radiology markets.

The cardiologist failed to establish a nexus between his purported exclusion from the market for radiology jobs and the anticompetitive effects of the alleged conduct, the court ruled.

Because the complaining radiologist obtained a position with a nearby hospital within two weeks of his termination the original radiology group, he could not show that he was excluded entirely from the market.

The radiologist did not demonstrate that the challenged conduct was anticompetitive. He failed to show that the behavior leading to his exclusion—the change of contractor in a long-standing practice of exclusive contracting for radiology services—was the type that might lessen competition among radiology providers for the right to practice in the market.

Finally, the complaining radiologist failed to establish that his termination stemmed directly from conduct that was illegal because of its anticompetitive effects on the price, output, or quality of radiology services available to consumers. There was no indication that the radiologist’s exclusion allowed the defendants to provide substandard radiology services and reduce consumer choice, it was noted.

The April 17 non-precedential decision in Bocobo v. Radiology Consultants of South Jersey, P.A. will appear in CCH Trade Regulation Reporter.

Patented Grape Varieties Were Not Relevant Markets for Monopoly Suit

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

A claim by table grape producers in California that the state's table grape commission violated federal antitrust law through a scheme involving the bad faith licensing and enforcement of alleged patent rights on grape varieties was properly dismissed for failure to identify a valid relevant product market, the U.S. Court of Appeals for the Federal Circuit in Washington, D.C. has ruled.

Dismissal of the producers’ Sherman Act, Sec. 2 claims (2009-1 Trade Cases ¶76,522) was affirmed.

Relevant Product Market

The producers claimed that the relevant product market consisted of several distinct patented varieties of table grapes and that the existence of the plant patents limited the myriad other varieties of table grapes from being substitutes for the patented varieties in the worldwide markets.

The complaining producers could not rely on the naked assertion that non-infringing grape varieties were not an adequate substitute for a patented product, especially when it was undisputed that other vines possessed at least some of the relevant characteristics that defined that product, the court reasoned.

The grape producers needed—but failed—to make some allegation that, if proved, would define the market or submarket with reference to consumer demand for the product and consumer demand for its reasonable substitutes.

The aspects of an invention that may have led the Patent and Trademark Office to issue a patent were not per se coterminous with the features of the patented product that may lead consumers to select that product over other similar ones, the court concluded.

The decision is Delano Farms Co. v. The California Table Grape Commission, 2011-2 Trade Cases ¶77,578.

Youth Hockey League’s Exclusive Participation Rule Could Be Anticompetitive

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

A for-profit youth hockey program adequately alleged monopolization and attempted monopolization claims against a local district of USA Hockey, the national governing board for amateur hockey, the federal district court in Minneapolis has ruled.

The complaining youth program challenged the local district's adoption of an "outside league rule," which prohibited players from participating in competing hockey leagues. The local district's motion to dismiss the monopoly claims was denied; however, the court rejected conspiracy claims.

Monopoly

The complaining program pled sufficient facts to state facially plausible monopoly claims that the defendants engaged in anticompetitive behavior under either an actual exclusion or market power test, according to the court.

The complaining program provided numerous affidavits of parents who withdrew their children from its programming as a result of the outside league rule. It also noted decreased enrollment in its leagues, losing up to 40 players as a result of the rule.

While these events might have been attributable to other factors, such as the downturn in the economy, along with the withdrawal of players already registered and who forfeited deposits, these facts alleged detrimental effects sufficient to survive a motion to dismiss, the court ruled.

Attempted Monopolization

Dismissal of the attempted monopolization claim was also denied. In order to state a claim of attempted unlawful monopolization, a plaintiff had to allege (1) a specific intent by the defendant to control prices or destroy competition; (2) predatory or anticompetitive conduct undertaken by the defendant directed to accomplishing the unlawful purpose; and (3) a dangerous probability of success.

Regarding specific intent, the complaining program alleged that the motive behind the rule was to prevent it from “taking” players from the defendants. Although the defending league’s stated purpose for the rule was to avoid scheduling conflicts and to prevent player fatigue, certain organizations that arguably would have caused such issues were exempted from the rule. Finally, the withdrawal of players from the complaining program, citing the rule, adequately alleged a dangerous probability of success.

Conspiracy

Conspiracy claims were not adequately alleged, however. The court found that the defendants should be considered part of a “unilateral actor.” The associations within the district did not compete and were deemed a “single economic actor.” Moreover, Minnesota Hockey, the state arm of the national hockey governing board, and the local district were incapable of conspiring.

The May 12 decision, Minnesota Made Hockey, Inc. v. Minnesota Hockey, Inc., is reported at 2011-1 Trade Cases ¶77,453.

Monopoly Claims Were Adequately Alleged Against Diaper Maker Kimberly-Clark

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

Last week, the federal district court in Harrisburg, Pennsylvania, refused to dismiss monopoly claims against Kimberly-Clark brought by competitor First Quality Baby Products, LLC. First Quality—a manufacturer of “private label” or store-brand diapers and training pants—adequately alleged that Kimberly-Clark used its more than 300 patents to disrupt competitors and to maintain a monopoly in the disposable baby diaper and training pants market.

First Quality claimed that Kimberly-Clark:

(1) Maintained a 35 percent share of the market for disposable baby diapers and a 75 percent share in the training pants market and

(2) Engaged in anticompetitive conduct to maintain its monopoly.

Sham Patent Litigation

Kimberly-Clark allegedly threatened patent lawsuits and then engaged in sham litigation to drain the resources of “private label” or store brand manufacturers, thereby reducing their ability to compete.

According to First Quality, Kimberly-Clark enforced patents that it knew to be invalid, procured through fraud on the Patent and Trademark Office (PTO), or not infringed. Further, Kimberly-Clark allegedly misrepresented the nature of the litigation in order to threaten retail outlets to make it the exclusive supplier of store-brand training pants.

Product Disparagement

First Quality also contended that Kimberly-Clark engaged in product disparagement through false claims and coercively acquired licensing agreements through settlements of secret arbitration proceedings.

Each of these acts in isolation might not itself not rise to the level of anticompetitive conduct, but in the aggregate it represented anticompetitive activity tied to the relevant markets that raised a plausible claim for relief, the court decided.

Conspiracy Claims

The court rejected Kimberly-Clark's contention that it was immune from antitrust liability under the Noerr-Pennington doctrine. The doctrine immunizes from antitrust liability those who petition the government. While prosecuting a patent infringement action was the type of activity protected by Noerr-Pennington, exceptions existed for activities that were mere “sham” and conduct before the PTO that was fraudulent.

Kimberly-Clark's conduct could fall within the exception for fraud on the PTO, also known as Walker Process fraud, according to the court. First Quality alleged that Kimberly-Clark deliberately and intentionally withheld material prior art in connection with the prosecution of a patent-in-suit, and, as a result, the PTO issued a patent that was invalid.

The text of the May 17 decision in Kimberly-Clark Worldwide, Inc v. First Quality Baby Products, LLC, appears at 2011-1 Trade Cases ¶77,452.

Monopoly Claims Against Food Products Company Fail

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

Retailers and other direct purchasers of “Fresh Del Monte Gold” pineapples failed to establish that Del Monte Fresh Produce Company improperly monopolized the market for fresh, whole, extra-sweet pineapples, the U.S. Court of Appeals ruled in a November 3 summary order.

A September 30, 2009, decision of the federal district court in New York City granting summary judgment in favor of Del Monte was affirmed.

In order to succeed on a Sherman Act, Sec. 2 monopolization claim, the plaintiffs had to establish both: possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power. The second element required proof of exclusionary or anticompetitive effects, the court explained.

The complaining purchasers did not raise a triable issue with respect to whether Del Monte’s challenged conduct had the requisite anticompetitive effect of delaying competitors’ entry into the market. They alleged that Del Monte improperly monopolized the market by (1) sending so-called “threat letters” to competitors and others giving the impression that the Fresh Del Monte Gold was patented and (2) engaging in sham patent litigation with respect to a related variety of pineapples.

There was no indication how the patent litigation involving the related variety of pineapples caused anticompetitive effect in a different pineapple market. The court noted that the effects of the threat letters “slightly more complex.” However, an inference that the threat letters had anticompetitive effects was not reasonable where the testimony of Del Monte's competitors showed that factors other than the threat letters delayed competitors’ entry into the relevant market.

Relevant Product Market

The appellate court assumed for sake of argument that Del Monte possessed monopoly power in the market for a particular variety of fresh extra-sweet pineapples; however, the lower court rejected the complaining purchasers’ relevant product market definition.

The district court concluded that the particular type of pineapple was not so unique as to constitute a separate submarket. The complaining purchasers failed to offer sufficient evidence of exceptional market conditions to justify the single brand market. Because the complaining purchasers did not argue that Del Monte had monopoly power in the broader pineapple market, their monopoly claims failed.

The lower court also rejected the plaintiffs’ expert's testimony on the relevant product market because of its insufficient factual basis and its unreliability. The expert's analysis overlooked relevant facts which showed that other types of pineapples were reasonable substitutes. While the expert utilized the 1997 version of the Department of Justice/FTC Merger Guidelines to formulate the market, the guidelines were applied in an overly mechanical fashion, in the court’s view.

Although an analysis of cross-price elasticity of demand (which was not undertaken) was not mandatory in determining a relevant product market, the analysis might have assisted the expert in defining the relevant market.

The November 3, 2010, summary order in American Banana Co. v. Del Monte Fresh Produce Co., No. 09-4561, will appear at 2010-2 Trade Cases ¶77,221.

“Price Squeeze” Theory Insufficient to Support Monopoly Claims: High Court

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

In an opinion by Chief Justice John Roberts, the U.S. Supreme Court today rejected an independent “price-squeeze” theory under Section 2 of the Sherman Act.

The Court ruled that AT&T—the telecommunications company that owns much of the infrastructure and facilities needed to provide digital subscriber line (DSL) services in California—would not have engaged in monopolization of the retail DSL market by engaging in a price squeeze vis-à-vis competing independent Internet service providers (ISPs), in the absence of an antitrust duty to deal at the wholesale level or predatory pricing at the retail level.

A decision of the U.S. Court of Appeals in San Francisco (2007-2 Trade Cases ¶75,875), holding that the price squeeze claim was potentially valid, was reversed. The Justice Department had contended that the appellate court erred in allowing the ISPs to proceed on their claims in the absence of an antitrust duty to deal or predatory pricing allegations.

The complaining independent ISPs filed an antitrust suit in 2003, claiming that AT&T engaged in a price squeeze in violation of Section 2 of the Sherman Act, which prohibits monopolization.

The ISPs—which received wholesale DSL transport service from AT&T and sold DSL directly to consumers in competition with AT&T—contended that the company did not leave them with a “fair” or “adequate” margin between the wholesale price and the retail price to compete.

Predatory Pricing

As a general rule, businesses are free to choose the parties with whom they deal, as well as the prices, terms, and conditions of that dealing, the Court explained. However, a dominant firm might incur antitrust liability for purely unilateral conduct by charging “predatory” prices—below-cost prices that drive rivals out of the market and allow the monopolist to raise its prices later and recoup its losses—or by refusing to deal where it has an antitrust duty to deal with its competitors.

The ISPs contended that AT&T squeezed their profit margins by setting a high wholesale price for DSL transport and a low retail price for DSL Internet service. This purportedly allowed AT&T to “preserve and maintain its monopoly control of DSL access to the Internet.” But the complaining ISPs did not allege a predatory pricing claim at least in their original complaint.

They did not contend that: (1) the challenged retail prices were below an appropriate measure of AT&T’s costs and (2) there was a dangerous probability that the AT&T would be able to recoup its investment in below-cost prices.

In rejecting an independent theory of liability based on a price squeeze, the Court said that recognizing a price squeeze in the absence of predatory pricing could lead firms to raise their retail prices or refrain from aggressive price competition to avoid potential antitrust liability.

Duty to Deal

While AT&T had a regulatory obligation to provide wholesale DSL service to the ISPs, it had no antitrust duty to deal, the Court noted. If AT&T had simply stopped providing DSL transport service to the complaining ISPs, it would not have run afoul of the Sherman Act.

The Court pointed to its recent decision in Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP (2004-1 Trade Cases ¶74,241) for the proposition that “if a firm has no antitrust duty to deal with its competitors at wholesale, it certainly has no duty to deal under terms and conditions that the rivals find commercially advantageous.”

Thus, only to the extent that a monopolist engages in a duty-to-deal violation at the wholesale level or predatory pricing at the retail level do plaintiffs have a remedy under existing antitrust law.

Remand

The matter was remanded to the district court to determine whether the ISPs' amended complaint, which was not before the Court, stated a claim in light of current pleading standards and whether the ISPs were entitled to leave to amend their complaint to bring a claim under the predatory pricing theory of the Supreme Court's 1993 decision in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp. (1993-1 Trade Cases ¶70,277).

Unusual Procedural Posture

The Court noted at the outset that it would consider the matter, even though the case had “assumed an unusual posture.” The case was not rendered moot by the petitioning ISPs' request that the Supreme Court vacate the federal appellate court's decision in its favor and remand with instructions that they be given leave to amend their complaint to allege a Brooke Group claim. The ISPs—“no longer pleased with their initial theory of the case”—determined that a dissenting opinion by Judge Ronald M. Gould in the appellate court stated the correct position that price squeeze claims must meet the Brooke Group requirements for predatory pricing.

The Supreme Court decided that it was appropriate to address the question presented. The parties continued to be adverse not only in the litigation as a whole, but also in the specific proceedings before the Supreme Court. AT&T asked the Supreme Court to reverse the judgment of the appellate court and remand with instructions to dismiss the complaint. The ISPs asked that the Supreme Court vacate the judgment and remand with instructions that they be given leave to amend their complaint.

It was not clear that the ISPs had unequivocally abandoned their price-squeeze claims addressed in the petition for certiorari. Further, in the absence of a Supreme Court decision on the merits, the appellate court’s decision would presumably have remained binding precedent in that circuit and a conflict among the circuits would have persisted, the Court reasoned.

Concurring Opinion

A concurring opinion, authored by Justice Stephen G. Breyer and joined by three other justices, would have remanded the case to the district court to determine whether the ISPs may proceed with their predatory pricing claim as set forth in Judge Gould’s dissenting Ninth Circuit opinion. The dissent also would have “accept[ed] respondents’ concession that the Ninth Circuit majority’s “price squeeze” holding is wrong.”

The February 25 opinion, Pacific Bell Telephone Co. v. linkLine Communications, Inc., appears here on the U.S. Supreme Court website. It will appear at 2009-1 Trade Cases ¶76,500.