America First: the Federal Trade Commission trial of McWane
The legal precedent one can derive from Federal Trade Commission v McWane, based on the ruling by the US Court of Appeals for the Eleventh Circuit that upheld the commission’s decision, is much narrower than the agency’s initial concerns, as the commission ultimately dismissed six of the seven counts alleged by complaint counsel.
A case that eventually settled on a single form of misconduct – exclusive dealing to maintain a monopoly in US-manufactured ductile iron-pipe fittings (DIPF) – was born from a wide-ranging investigation into multiple parts of McWane’s business. Plaintiffs’ lawyers picked up these lines of enquiry to bring private claims, as in the Cast Iron Soil Pipe and Fittings antitrust litigation. The probability of such follow-on treble damages lawsuits makes any anticompetitive conduct difficult to admit, but particularly collusive behaviour. The plaintiffs’ bar is well versed in how to measure and trace harm to direct and indirect purchasers from a price-fixing agreement, which means companies are especially determined to fight charges that they conspired.
The FTC probe began in January 2010 when McWane competitor Star Pipe complained that McWane used its monopoly to foreclose it from from the US-made pipe fittings market. Two years later, FTC complaint counsel formally accused McWane of conspiring with Star Pipe Products and Sigma Corporation to raise and stabilise the price of a single product that made up only 5% of the company’s business: DIPF. To support the allegation, the complaint focused on a series of price increases in 2008 in which McWane would publicly announce a price hike, and Sigma and Star would follow.
FTC lawyers wrote that the passage of the American Recovery and Reinvestment Act (ARRA) of 2009 altered the competitive dynamics of the industry, and altered how the industry players coordinated. The law infused money into the US economy after the financial crisis of 2008, with a particular emphasis on state and municipal construction projects in the wake of the housing market collapse. In addition to employing American labour, the law called for such projects to use US-made parts and products. This expansion in the market for domestically-manufactured DIPF attracted competitors to a market in which McWane had held an actual monopoly: before the ARRA, nearly 100% of all such fittings were made in its foundries.
The FTC complaint accused McWane of maintaining its monopoly in the US-made DIPF market through exclusionary conduct, including a distribution deal with Sigma and exclusive dealing policies that impeded Star Pipe’s entry into that market.
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McWane’s chief trial counsel, Baker Botts partner Joseph Ostoyich, says the conspiracy allegations were “the more potentially devastating part of the case because allegations of a price-fixing conspiracy were more likely to inspire copycat class actions by private plaintiffs – at least that’s what we thought, although class lawyers ended up copying all of the counts anyway.” As a result, much of the trial focused on the conspiracy claims. Witnesses from each of the three companies were questioned at length, including one who spent more than two days on the stand, and all flatly denied participating in the alleged conspiracies.
The administrative law hearing at the FTC began on 4 September 2012 and lasted until the beginning of November, with post-trial briefing and closing arguments stretching into late January 2013. Chief administrative law judge D Michael Chappell’s courtroom at the FTC’s headquarters was no different from a federal courtroom in its professionalism, Ostoyich says, but did have its own rules that diverged from the federal rules for evidence and civil procedure rules: “some specific differences that are the nature of the beast.” This included the judge allowing into the record hearsay and other evidence typically kept from a jury.
While McWane lost a Daubert motion to exclude the FTC’s expert witness on the grounds that his opinions were not economically rigorous, defence counsel did not see Laurence Schumann’s testimony as a great help to the FTC’s case. “I thought he really fell apart on cross-examination. He was so nervous and upset during his testimony that he got a migraine and couldn’t testify for two days,” Ostoyich says. The trial record reflects that Schumann had to take a break for migraine medication and that this “witness issue”, in the judge’s words, caused the hearing to be suspended on the Thursday afternoon and Friday before Columbus Day weekend.
Schumann opined that the alleged conspiracy began to “collapse” and ended in the fourth quarter of 2008 due to the participants’ cheating, but the lawyers with whom he worked did not agree. Judge Chappell later criticised complaint counsel for “endeavor[ing] to distance itself from the record opinion of its own expert”, and positing that the conspiracy that collapsed in 2008 was distinct from an “‘overall’ conspiracy to raise and stabilise prices, which, complaint counsel implies, has yet to end.” He said the FTC lawyers should stick to their expert’s conclusions, especially as they had not discredited his testimony at the time he made it.
On 9 May, Judge Chappell decided that complaint counsel failed to prove any conspiracy, the allegation of which relied on a “daisy chain of assumptions [that] fails to support or justify an evidentiary inference of any unlawful agreement involving McWane.” But despite McWane’s denial that domestically-manufactured DIPF was a relevant product market, Judge Chappell found that the greater weight of evidence demonstrated it was – and that McWane monopolised it.
“I think the judge looked at it and didn’t see a conspiracy, but he probably figured we’re going to split the baby in some sense or other,” Ostoyich says.
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During the hearing, Ostoyich had barraged Schumann with questions about US Environmental Protection Agency waivers that would have allowed ARRA-funded waterworks projects to use foreign-made pipe fittings. For example, in a blanket nationwide waiver of the “Buy American” requirement, projects already in place before the enactment of the law in 2009 could receive stimulus funding while finishing the work with imported fittings. Nonetheless, Judge Chappell found that, aside from a few exceptions, ARRA-funded projects did not use foreign fittings. The administrative law judge, and later the commissioners and the Eleventh Circuit, accepted Schumann’s analysis: contracts specifying that pipe fittings must be made in the US created a distinct relevant market for domestically manufactured DIPF.
Schumann testified that before ARRA, 15-20% of the overall fittings market was for projects that would accept only US-made fittings, and McWane’s expert, Dr Parker Normann, estimated in 2010 that projects with Buy American requirements grew to 28% of the market. However, as the experts agreed, the demand for US-made fittings fell back to its pre-ARRA level when stimulus funding dried up in 2011. Fittings are also a small part of waterworks projects, making up less than 5% of the total cost on average.
“To me, the legacy of the entire set of investigations and the lawsuit is somewhat of a misguided federal government effort to really micromanage a very small part of the economy that did not require that kind of micromanaging,” Ostoyich says. “If I look back at the amount of effort and money the client spent on all these investigations and what came out of it . . . . We spent a lot of time litigating whether the Ductile Iron Fittings Research Association – the trade association for fittings – was used to facilitate collusion, and whether there was collusion on imported fittings. And every witness testified that never happened.”
He says of the FTC lawyers: “They really treated it like a private plaintiff’s’ case; they were really hell-bent on finding a violation against this company.”
Normally, anticompetitive monopolisation is thought to be much more difficult to prove than anticompetitive agreement. The McWane case flipped this conventional wisdom; Judge Chappell found pro-competitive reasons for McWane to hope or expect its rivals would follow its price signals as they historically had done, undercutting complaint counsel’s collusion claims. And despite evaluating exclusive dealing under the rule of reason, the judge said the full support programme – in which McWane required customers to buy all their US-made fittings from the company if they wanted to be able to buy specific kinds only available from McWane – lacked a pro-competitive justification.
Ostoyich notes that having brought the case under Section 5 of the FTC Act, rather than Section 2 of the Sherman Act, complaint counsel did not have to show antitrust injury and damages in the more rigorous manner a private plaintiff would need to establish. Of the hundreds of customers for domestic fittings and “presumably protected by the FTC, not a single customer walked into the courtroom complaining about McWane’s domestic fittings prices,” he says. “Not one testified that it thought domestic fittings prices were too high because of a monopoly.”
Judge Chappell’s opinion counters this point: “Although distributors may not have complained about prices of domestic fittings at trial, they did complain about McWane’s full support programme, announced 22 September 2009.”
McWane argued that without the programme, customers could “cherry-pick” by purchasing the high-volume fittings from Star, which paid several US jobber foundries to make them, while buying from McWane only those rarely needed fittings for which McWane was the sole US manufacturer. But Judge Chappell wrote: “McWane’s desire to increase sales for its last remaining United States foundry may be a laudable business objective. It is not, however, a valid justification for exclusionary conduct.” Instead, the judge said, such a justification must relate “directly or indirectly to the enhancement of consumer welfare”.
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After Judge Chappell ruled for McWane on the conspiracy claims but for complaint counsel on the monopolisation counts, both sides appealed to the commission. At oral argument in August 2013, McWane again framed maintaining its US facilities as a valid antitrust rationale for its full support programme. When Commissioner Ohlhausen asked Ostoyich about the pro-competitive justifications for the programme – “what were the benefits to consumers for that programme?” – he insisted that maintaining domestic production counted. “Everybody else in domestic production had gotten out of this business,” Ostoyich told the commissioners, as cheap Chinese imports undercut US-made fittings. As Ostoyich said during oral arguments:
My primary witness literally broke down on the stand, couldn’t control himself, and started sobbing uncontrollably because he had to recount when he had to shut the Tyler facility down in Texas and lay everybody off, OK? The domestic industry is on the verge of extinction. The Union foundries in the last decade are operating at 30% capacity, and in 2008 – before ARRA was passed – was at about 10,000 tons of production. And the witness testimony was that if they went to eight, seven or eight, they probably wouldn’t survive, and they would probably shut down and lay a bunch more people off. So, what [McWane] said was: ‘Here’s a pretty weak letter. We hope you’ll support our foundry and, if you don’t, we might have to take other decisions, short-term decisions.’
The witness of whom Ostoyich spoke, Richard Tatman, joined McWane in May 2006 and took charge of the Tyler/Union facility in 2007 – a year before it closed. As the key defence witness, he was a recurring subject of discussion at oral argument before the commissioners – though they never saw him.
When the FTC commissioners review a decision by the agency’s administrative law judge, their role is different than a federal appellate court reviewing a trial court’s decision. They review de novo on factual as well as legal findings. During oral argument, Commissioner Julie Brill questioned Tatman’s credibility while saying she would not be able to recognise him in the courtroom. Ostoyich retorted that this raised the critical issue of whether the FTC process “makes sense” if the commissioners will not rely on the credibility determinations of the administrative law judge.
In the end, neither the four commissioners nor a three-judge panel of the Eleventh Circuit bought McWane’s argument that keeping its domestic facilities open was a pro-competitive justification for coercing distributors into buying all their US-made DIPF from McWane. FTC chairwoman Edith Ramirez’s majority opinion for the commission not only agreed with Judge Chappell that this rationale did not benefit consumer welfare, but added that “contemporaneous evidence belies McWane’s contention that its exclusive dealing policies were motivated by a desire to gain volume in order to preserve operations at McWane’s domestic foundry.” The Eleventh Circuit agreed with this point in its unanimous ruling affirming the FTC decision.
Even Commissioner Joshua Wright, who dissented from the majority, did not back McWane’s argued pro-competitive justification. Instead, he said the generally pro-competitive nature of exclusive dealing should create a heavier burden on plaintiffs in challenging such restraints. “Because complaint counsel has not carried its prima facie burden of establishing anticompetitive effect, I do not consider whether respondent has asserted a non-pretextual procompetitive justification for the full support programme,” Wright wrote.
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Four years after Judge Chappell ruled against his client, Ostoyich looks back on FTC v McWane as “a fascinating case. It was a good example of an agency that was trying to push the envelope.”
However, he thinks it left the law of exclusive dealing “a mess” in which guiding clients is difficult, due to market share, explicitness of the exclusivity and the incentives for exclusivity that determine whether a form of conduct that economists say is generally pro-competitive could get a company in trouble. Ostoyich still says the FTC complaint counsel lacked a rigorous economic analysis showing a negative effect on consumers, and that the Eleventh Circuit ducked that issue by employing an abuse of discretion standard that deferred to the commission. “So that depends on the composition of the commission. I haven’t seen the commission bring a lot of cases like this. I don’t think they’re likely to in this administration,” speaking of the Trump administration.
Indeed, as President Donald Trump promised infrastructure spending both to shore up sagging bridges and roads and boost blue-collar US jobs, any such programme seems likely to come with the same – if not stronger – Buy American provisions as his predecessor’s stimulus. Having run on an “America First” platform that specifically called out Chinese imports as a hazard to US workers, President Trump might struggle to accept federal agencies, led by his appointees, bringing an antitrust challenge to a company that cited the preservation of domestic jobs as a pro-competitive justification.