McWane: Stories from the GCR Archives

FTC challenges pipe fittings cartel

Originally published 5 January 2012

The US Federal Trade Commission has accused the three largest US suppliers of iron pipe fittings of participating in a cartel to increase prices and defending the monopolistic position of one of the businesses.

McWane, Star Pipe Products and Sigma Corporation distribute ductile iron pipe fittings (DIPF), used in public water networks to link pipes. The FTC accused the companies of fixing the price of imported pipe fittings. It also alleged that McWane and Sigma agreed to maintain McWane’s monopoly on fittings made in the US.

Richard Feinstein, FTC bureau of competition head, says: “The complaints allege a broad range of collusive and exclusionary conduct calculated to raise the price of DIPF, an essential component of the nation’s water infrastructure.”

The FTC says the companies first talked in the beginning of 2008 when McWane approached Star and Sigma. The businesses consequently raised their prices in January 2008 and June 2008.

The commission also alleges the three companies exchanged information on their sales through the trade association Ductile Iron Fittings Research Association (DIFRA) between June 2008 and January 2009.

According to the FTC, the collusion ended in early 2009, although Sigma tried to restart the cartel in April 2009.

McWane rejects the accusations and says the case is an “example of a regulatory agency unreasonably stretching the boundaries of its enforcement powers”.

Ruffner Page, president of the company, said in a statement: “At no time did anyone from our company collude with a competitor about pricing. The only information that DIFRA gathered and distributed was old and aggregated sales volume totals that were limited to a six-month period and submitted on a blind basis to an accounting firm. There was nothing anticompetitive about DIFRA’s work, which is the type of data gathering common among all industry associations and is designed to help the members plan production schedules.”

In a separate complaint, the FTC accused Sigma and McWane of colluding to defend McWane’s monopoly in the market for DIPF manufactured in the US, as opposed to imported fittings.

According to the commission, Sigma, Star and other companies tried to break McWane’s monopoly in the market for US-made fittings in 2009 after ending their cartel.

In February 2009, the US government allocated $6 billion to public work on US water networks. As some of the funding was designated to infrastructure being produced in the US, McWane’s competitors tried to enter the market for US-made pipe fittings.

But the FTC says McWane reached a non-compete agreement with Sigma in September 2009 in which Sigma refrained from competing and challenging McWane’s monopoly. In return McWane allegedly compensated Sigma, sharing its profits.

According to the commission, McWane and Sigma excluded Star from the market by threatening to penalise clients if they also bought Star’s products.

The FTC is bringing forward the cartel complaint against McWane and Star, which will be heard by an administrative law judge. Sigma agreed to settle the charges and committed to refrain from engaging in similar practices in future.

Terry Calvani, at Freshfields Bruckhaus Deringer in Washington, DC, says cartel prosecution generally falls to the DOJ’s Antitrust Division, although both agencies have concurrent jurisdiction.

“The FTC has brought cartel cases over the years, but generally these are cases which the DOJ has decided are inappropriate for criminal prosecution,” he says. “Many of the FTC cartel cases have involved public conduct where there is no element that the parties sought to hide their behavior. For example, many have involved fights between healthcare providers where physicians would collude in their negotiations with intermediaries.”

FTC Commissioner Thomas Rosch voted in favour of both the complaint against McWane and Star, and the settlement with Sigma, but objected to accusations of exclusive dealing by McWane and Sigma.

“I respectfully object to the inclusion [in the complaint] of claims against McWane and Sigma, to the extent that such claims are based on allegations of exclusive dealing,” wrote Rosch in a separate statement.

In a recent settlement between the FTC and swimming pools component maker PoolCorp regarding exclusionary acts, Commissioner Rosch objected to allegations of abusive conduct on similar grounds, questioning whether practices employed by the alleged cartelists actually had anticompetitive effects.

Joe Ostoyich, at Baker Botts in Washington, DC and counsel to McWane, says the company will “aggressively defend” itself against the FTC’s allegations.

“The facts are very different from the government’s rhetoric and their theories go way beyond existing law,” he says. “I agree with Commissioner Rosch that a number of courts of appeal have already ‘bless[ed]’ the type of conduct alleged in the complaint.”

Rosch also objected to the inclusion of Star as a cartelist.

“I do not consider naming Star, along with McWane and Sigma, as a co-conspirator to be in the public interest,” wrote Rosch. “I am concerned that a trier of fact may find it hard to believe that Star could be both a victim of McWane’s alleged ‘threats’ to deal exclusively with distributors, and at more or less the same time, a co-conspirator with McWane in a price-fixing conspiracy.”

Judge throws out “daisy chain” FTC cartel complaint

By Faaez Samadi

Originally published 10 May 2013

An administrative judge has partly dismissed an FTC complaint that three companies colluded to fix prices, but has upheld allegations of exclusionary conduct.

In January 2012, the FTC accused McWane, Star Pipe Products and Sigma of a price-fixing conspiracy regarding imported DIPF used in public water networks to link pipes. The authority also alleged that Sigma and McWane colluded to maintain McWane’s dominance in the market for US-made fittings.

In his ruling yesterday, chief administrative law judge D Michael Chappell rejected the FTC’s conspiracy allegations, saying the commission failed to prove the alleged conspiracy.

“Accepting complaint counsel’s conspiracy theory depends on accepting numerous assertions, assumptions and inferences that are not sufficiently grounded in evidence,” he says. “In addition, the preponderance of the economic evidence is not consistent with the alleged conspiracy.”

Star and Sigma had previously settled with the FTC. But McWane denied the allegations and Judge Chappell was highly critical of the FTC’s collusion claims.

“Complaint counsel’s daisy chain of assumptions fails to support or justify an evidentiary inference of any unlawful agreement involving McWane,” wrote Judge Chappell in his ruling.

“Viewed as whole, the preponderance of the evidence fails to prove the alleged conspiracy among McWane, Sigma and Star to raise and stabilize prices in the fittings market and, therefore, complaint counsel has not met its burden of proof on count one of the complaint,” he adds.

G Ruffner Page, president of McWane, said: “Judge Chappell’s conclusions that we did not collude or conspire to fix prices confirms what we have said all along. We are very pleased that Judge Chappell dismissed these unwarranted and speculative allegations, and that he recognized that McWane’s conduct was pro-competitive and legal.”

But the ruling did uphold the FTC’s allegations that McWane entered into a distribution agreement with Sigma that restrained trade in the domestic pipe fittings market and excluded Star. Judge Chappell found that the domestic fittings market was separate to the import market because some state and federal laws only allow for domestic products to be used in
waterworks projects.

The judge ruled that McWane had monopoly power in the domestic market and set up exclusive dealing arrangements to prevent Star from entering.

Jonathan Jacobson, at Wilson Sonsini Goodrich & Rosati in New York, said: “An administrative law judge rejection of an FTC complaint is not uncommon. What is unusual here is the rejection – based on a preponderance of the evidence – of a horizontal theory while finding in the FTC’s favour on a unilateral conduct theory. Unilateral cases are usually more difficult to prove.”

FTC delays decision on iron pipe fittings

By Pallavi Guniganti

Originally published 22 November 2013

The FTC’s announcement on Friday that it would extend its deadline for issuing a final decision by another two months is the latest sign of trouble for a case against McWane that has proven difficult for the agency.

The official statement from the commission said the delay was “to ensure that it can give full consideration to the many issues presented by the cross-appeals in this matter.” The original schedule had called for a decision by 30 November; the new timetable runs until 24 January.

The cross-appeals stem from a mixed decision issued in May by the FTC’s chief administrative law judge, D Michael Chappell. He threw out price-­fixing charges against McWane, but upheld the exclusionary conduct allegations. Lawyers for the FTC are appealing the price collusion ruling to the commissioners, while McWane is appealing the exclusionary conduct allegations, which have been controversial even within the commission.

When the FTC first brought its administrative complaints in January 2012, then commissioner J Thomas Rosch dissented partially. He agreed with the price-fixing accusations, but wrote that the complaint did not “adequately allege exclusive dealing as a matter of law. In particular, there is case law in both the Eighth and Ninth Circuits blessing the conduct that the complaints charge as exclusive dealing.”

The complaint claimed that McWane invited its competitors, Sigma and Star Pipe, to collude with it beginning in early 2008 in a plan to raise and fix prices for imported DIPF, and that Sigma and Star accepted the invitation to collude and raised their prices. Sigma settled with the commission before the complaint was filed and Star Pipe reached a consent agreement shortly after. According to the FTC, the three firms exchanged information through a trade association and used this information to monitor compliance with
the agreement.

This charge failed in front of Judge Chappell, who said neither factual nor economic evidence supported the conspiracy claims. However, he found that the accusations of monopolistic practices, attempts and conspiracy to monopolise, and monopoly power in the domestically manufactured pipe fittings market had been proven by a preponderance of the evidence.

The administrative law judge’s ruling was 476 pages long, and the record of the case now runs to many thousands of pages. Observers say the commissioners’ delay in issuing a final decision and order may be attributable to the sheer size and complexity of the case, as well as the loss of more than two weeks’ work in October owing to the government shutdown.

Other factors also may be in play. At a recent hearing before the House Judiciary Committee, Republican lawmakers blasted the ­commissioners’ record of overturning their own administrative law judges’ decisions to
uphold complaints.

Representative Spencer Bachus cited reports that the commissioners had not ruled in favour of a defendant since 1995, and Representative Jason Smith quoted a report by Commissioner Joshua Wright – prepared before he joined the FTC – saying the commission was reversed by appellate courts at four times the rate of the average federal trial judge.

The FTC is currently divided evenly between its Democratic and Republican members, while Democratic nominee Terrell McSweeny awaits confirmation by the full Senate. In the case of a 2-2 split on a decision, there is no action by the commission. Such an outcome would be unusual, with antitrust experts in both government and private practice saying they could not remember the last time it had occurred in reviewing a FTC judge’s decision.

The commissioners’ 2-2 deadlock in 1993 on filing an administrative complaint against Microsoft led to the suspension of the FTC investigation and the DOJ taking over the case. In 2001, four commissioners could not reach a majority decision on a consent agreement or a preliminary injunction in the General Mills/Pillsbury tie-up, allowing the merger to go ahead with no
formal commitments.

McWane decision reveals divided commission

By Pallavi Guniganti

Originally published 6 February 2014

The FTC’s dismissal of all but one count in its complaint against metal fabricator McWane was a narrow victory for the company, with the agency’s Democratic appointees finding a price-fixing conspiracy but its Republican appointees disagreeing.

The commissioners split 2-2 on the allegations of unlawful conspiracy and information exchange, against which administrative law judge D Michael Chappell had ruled. Chairwoman Edith Ramirez wrote: “In the absence of a majority decision, we dismiss these counts in the public interest.”

The agency filed an administrative complaint against McWane in January 2012, and the commissioners’ original schedule called for the FTC to reach a decision on appeals of the administrative law judge’s May 2013 ruling by November of last year. It extended that deadline to 24 January, and sources close to the case say the “public interest” may have been to avoid dragging a resolution out even longer.

However, had President Barack Obama’s FTC nominee Terrell McSweeny been seated and broken the tie by voting with the other Democratic appointees, McWane would have been found liable for horizontal as well as for exclusionary conduct.

The third count was not appealed against by complaint counsel. The commissioners were unanimous in dismissing the fourth count, for which they concluded that complaint counsel had failed to establish that McWane’s distribution relationship with Sigma was unlawful.

This decision reversed Judge Chappell’s finding that the sole source and pricing provisions of the McWane-Sigma agreement were unnecessary and lacked pro-competitive justifications, rendering it an unreasonable restraint of trade. The commissioners deemed it unnecessary to reach counts five and seven, alleging that Sigma and McWane had conspired to monopolise, and that the exclusive dealing policy constituted attempted monopolisation.

McWane’s attorneys at Baker Botts trumpeted the commissioners’ dismissal of counts one, two and four, noting that “this marked the first time in nearly two decades that the commission has ruled against itself following an administrative trial in its in-house court.” Some House Republicans, as well as antitrust specialists such as David Balto, have been critical of the FTC’s ability not only to bring cases before an administrative law judge rather than a federal court, but also to reverse the administrative judge when his decisions went against the agency.

Commissioner Joshua Wright issued a lengthy dissent in which he argued against the majority’s upholding one charge against McWane, and also distinguished his position from theirs regarding the dismissal of count seven, and the existence of a separate relevant market for domestic fittings.

Sigma and Star Pipe historically were importers, bringing in imported fittings made overseas, while McWane manufactured both in the US and overseas. With the 2009 legislation requiring construction materials in stimulus projects to be made in the US, there arguably arose a distinct and significant market for domestically manufactured DIPF.

To compete in this market, Star contracted with US foundries to make pipe fittings that would meet “Buy American” requirements, and it claimed that it would have purchased a US foundry if it had continued to profit in the domestic fittings market.

However, as alleged in count six of the FTC complaint, McWane responded to this competition from Star by instituting a “full support” programme that required customers to buy only McWane domestic fittings, either directly or through Sigma. If customers bought Star’s domestic fittings, they could lose their rebates on current orders with McWane and be cut off from making future orders. As a new entrant, Star could offer only some of the fittings customers needed, and could not substitute fully for McWane.

Complaint counsel said this programme harmed competition in the domestic pipe fittings market, and convinced Judge Chappell and three commissioners. Wright assumed for the sake of argument that there was a separate relevant market for US-made pipe fittings in which McWane had monopoly power, and conceded that the full support programme had exclusionary potential.

“There is ample record evidence demonstrating that the full support programme harmed McWane’s rival, Star. But, in my view, complaint counsel fails totally to establish, as it must under the antitrust laws, that McWane’s conduct harmed competition,” Wright wrote in his dissent.

Demonstrating that McWane’s conduct had a negative effect on price or output would have been direct evidence of such harm, but Wright did not accept complaint counsel’s argument that the increase in McWane’s prices after Star’s entry in the domestic fittings market showed that McWane’s conduct had affected price. He wrote that the record suggests the price increase was caused by other factors, such as a demand spike and increased costs.

“If the challenged conduct that occurred in 2009 and 2010 harmed competition, complaint counsel ought to be able to prove it with evidence that consumers of domestic pipe fittings are worse off as a result of McWane’s conduct. The record is clear that there is no such proof,” Wright wrote (original emphasis).

Given Wright’s oft-stated fondness for economic evidence, he might have found an economic expert’s analysis more convincing. McWane’s attorney, Baker Botts partner Joe Ostoyich, said the government did not present an economist who had engaged in such analysis, whereas the company called Parker Normann of Edgeworth Economics to test the key propositions in the case: the relevant market definition, market power and causation of antitrust injury.

“The government completely failed to offer that. Without that, in my view, we might as well scrap the antitrust laws and just go with common law torts,” Ostoyich said.

The majority countered that Wright was demanding a new, heightened standard of proof for exclusive dealing cases by deeming the evidence that McWane’s programme impaired its only rival’s access to the main channel of distribution, “thereby increasing [Star’s] costs and keeping it below the critical level necessary to pose a real competitive threat”, as insufficient to show harm to competition.

FTC wins at Eleventh Circuit but McWane vows further appeals

By Pallavi Guniganti

Originally published 16 April 2015

The FTC has prevailed before the appeals court against McWane, but the exclusive dealing pipe maker said the decision ignored legal precedent and confirmed it would appeal against it.

In a judgment by Judge Stanley Marcus and joined by Judges Jill Pryor and Robert Hinkle, the Court of Appeals for the Eleventh Circuit ruled that the commissioners’ decision against McWane’s exclusive dealing – the only count remaining after an administrative trial and split commission votes whittled down the other six charges in the complaint – was sound.

“The commission’s factual and economic conclusions – identifying the relevant product market for domestic fittings produced for domestic-only projects, finding that McWane had monopoly power in that market and determining that McWane’s exclusivity programme harmed competition – are supported by substantial evidence in the record, as required by our deferential standard of review, and their legal conclusions are supported by the governing law,”
Marcus wrote.

After much of the DIPF manufacturing moved overseas, McWane was the sole US producer. But when Congress passed legislation in the wake of the 2008 economic crisis that required large building projects to use pipe fittings made in America, Star Pipe entered the market offering a limited set of domestically manufactured products it had contracted with foundries to make.

McWane told its distributors that they must buy all their domestic fittings from it or else lose their rebates and be unable to buy for three months, which the FTC administrative law judge and a majority of commissioners found to violate Section 2 of the Sherman Act. The agency deemed the policy to be exclusive dealing used to maintain monopoly power in the US-made fittings market.

The company appealed against the decision, disputing the domestic-only market definition and, even within that market, the notion it had monopoly power given Star Pipe’s entry and accumulation of a 5% market share by 2010 when the FTC began investigating.

The Eleventh Circuit noted “damning” internal documents that showed McWane’s anticompetitive intent to raise Star Pipe’s costs and prevent it from reaching a critical market mass that would allow it to invest, perhaps running its own domestic foundry. But it also summarised FTC Commissioner Joshua Wright’s dissent from the commission’s decision, which argued that the agency lacked evidence of harm to competition.

Judge Marcus specified at length that the commission’s determinations of market definition, monopoly power and lack of pro-competitive benefits to offset the anticompetitive effects “are factual or economic conclusions reviewed only for substantial evidence”.

McWane said the Eleventh Circuit requires econometric evidence of cross-elasticity of demand for a market definition, but the judge wrote that “there appears to be no support in the case law for McWane’s claim that such a technical analysis is always required.” Persistent price differences, customers and unsubstitutability sufficiently supported the commission’s domestic-only ­market definition, he said.

Regarding monopoly power, Judge Marcus found greater difficulty with the circumstantial evidence.

Though McWane still had a 90% market share at its lowest point, he noted Star Pipe’s entry and case law from other circuits that appears to support McWane’s position that barriers to entry were low. In the absence of an Eleventh Circuit precedent directly on point, the judge said McWane’s overwhelming market share and pricing power, and the large investment needed to enter the market, were adequate to support the commission’s conclusion.

Looking at the practical competitive effect of the exclusive dealing, the Eleventh Circuit considered foreclosure among other factors: effect on price or output, degree of rivals’ exclusion, duration of exclusion and Star Pipe’s alternative channels of distribution.

“Putting aside the possible economic merits of raising the standard of proof for exclusive dealing cases, we can find no foundation for this conclusion in the caselaw. The governing Supreme Court precedent speaks not of ‘clear evidence’ or definitive proof of anti-competitive harm, but of ‘probable effect’,” Judge Marcus wrote.

In a press release responding to the decision, McWane heavily quoted Wright’s dissent and defended the rebate that could be withheld from disloyal distributors as a price cut, designed to reward customers for helping to keep the domestic foundry operating and employing Americans.

Company president G Ruffner Page said: “To characterize that as unfair competition under Section 5 flies in the face of the overwhelming evidence at trial and established judicial precedent. And to claim that it somehow excluded Star and injured competition is out-and-out nonsense, as Commissioner Wright pointed out.”

The commission did not issue a statement on the Eleventh Circuit’s ruling yesterday, although Commissioner Maureen Ohlhausen noted on Twitter that the FTC had won the appeal.

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