United States: Vertical Restraints

This article reviews developments in vertical restraints law in the US since 1 June 2015. For an overview of the law of vertical restraints, the reader should consult the chapter on US vertical restraints in The Antitrust Review of The Americas 2014.

Price restraints

In the nearly a decade since the Supreme Court ruled in Leegin¹ that minimum resale price maintenance (RPM) agreements are to be evaluated under the rule of reason, few cases have reached the federal courts in which these agreements have been analysed. We consider two of them in which opinions were filed in 2015.

In Costco Wholesale Corp v Johnson & Johnson Vision Care, Inc,² the United States District Court for the Middle District of Florida looked at allegations by Costco Wholesale Corporation (Costco), a large retail chain, that Johnson & Johnson Vision Care, Inc (JJVC) conspired with eyecare professionals (ECPs), distributors and retailers to fix the minimum price at which its contact lenses were sold at retail. Costco alleged that JJVC had implemented what JJVC called its Unilateral Pricing Policy (Policy) in violation of Section 1 of the Sherman Act, analogous provisions of California and Maryland antitrust law, and a provision of New York’s General Business Law. The Policy provided that JJVC and its distributors would cease supplying a retailer with lenses if the retailer were to price them below the minimum price established by JJVC. JJVC argued that the Policy was unilateral and was not administered pursuant to any agreement with ECPs, distributors or retailers.

The court held that the legality of any vertical agreement between JJVC and its resellers would be tested under the rule of reason.³ Costco needed to prove, according to the court, (1) the anticompetitive effect of JJVC’s conduct on a relevant market and (2) that the conduct lacks any procompetitive benefit or justification,⁴ and it  analysed the sufficiency of the complaint under these criteria. After concluding that Costco had antitrust standing to bring the action, the court held that the complaint adequately alleged relevant product markets, one comprising Costco and other firms that purchase lenses from JJVC (the Wholesale Market) and the other comprising their downstream customers (the Retail Market). Since JJVC was one of only four firms manufacturing contact lenses in the relevant geographic market (United States) and had a 43 per cent market share, the court had little difficulty holding that the complaint adequately alleged ‘a plausible claim of actual and potential harm to competition and consumers in the market.’⁵

The court rejected JJVC’s contention that the Policy was administered unilaterally. Construing the complaint most favourably to Costco, the court held that the allegations would, if proved, support claims of a vertical price-fixing conspiracy between JJVC and ECPs, between JJVC and distributors and between JJVC and other retailers, including Costco.⁶ Turning to Costco’s state law claims, the court held that the complaint stated claims for resale price maintenance under California’s Cartwright Act and Maryland’s Antitrust Act.⁷ It dismissed the claim under New York law, holding that section 369-a of the General Business Law, which provides that a resale price maintenance provision is unenforceable, does not create a private cause of action.⁸

Failure to prove market power doomed RPM claims in Hannah’s Boutique, Inc v Surdej.⁹ A retailer of prom and homecoming dresses in the Chicago area, Hannah’s Boutique, sued a competing retailer, Peaches Boutique, on various theories, the principal of which was that Peaches had induced designers of prom and homecoming dresses not to sell to Hannah’s. In granting Peaches’ motion for summary judgment, the court held that there was no evidence to support a claim that Peaches had organised a horizontal conspiracy among designers to boycott Hannah’s. It then considered an alternative vertical restraints claim – that Peaches had induced certain designers to enter into RPM agreements with retailers requiring the retailers to price dresses sold on the internet above the price at which they were sold at the retailers’ brick and mortar stores. The court rejected Hannah’s argument that the agreements should be evaluated under the per se rule and, following Leegin, held that they were subject to the rule of reason.¹⁰ Under the rule of reason, Hannah’s was required to prove that Peaches had market power.

Hannah’s argued that it should be able to carry its market power burden by pointing to direct effects of the claimed restraint, without the need to introduce evidence of market share. The court disagreed, holding that before Hannah’s could rely on evidence of direct effects, it must establish the rough contours of a relevant market and show that Peaches ‘commands a substantial share of the market.’¹¹ Hannah’s conceded that it could not calculate Peaches’ market share, and the court therefore entered judgment on the vertical claim for failure to prove market power.¹²

Non-price restraints on distribution

Unilateral refusal to deal

The Supreme Court held nearly 100 years ago in Colgate¹³ that a firm is free to refuse to sell goods to a customer as long as its decision is unilateral. Assuming that there are no facts suggesting monopolisation or attempted monopolisation, a refusal to deal raises no antitrust issues, because there is no combination or conspiracy within section 1 of the Sherman Act.¹⁴ The continuing authority of Colgate was explicitly recognised in two decisions this past year.

A purchaser of fast-set spray foam equipment (FSE), Insulate SB, Inc, sued a manufacturer of FSE, Graco Inc, for conspiring with its distributors to block competitors from access to the FSE market. The Court of Appeals for the Eighth Circuit affirmed dismissal of the complaint in Insulate SB, Inc v Advanced Finishing Systems, Inc.¹⁵ Insulate alleged that Graco, with 90 per cent of the FSE market, had entered into exclusive dealing arrangements with its distributors, the effect of which was to block competitor access to the market and drive up prices. According to Insulate, Graco conspired with its distributors by insisting that they honour the ‘best efforts’ obligation in their contracts and refuse to carry lines of competing manufacturers. In a letter to distributors, Graco had indicated that it would review its relationship with any distributor that took on a competitive line and thereby compromised its duty to give best efforts. The court held that Insulate had failed to allege facts adequate to support an inference of conspiracy and, quoting from Colgate, pointed out that a manufacturer remains free ‘to exercise his own independent discretion as to parties with whom he will deal.’¹⁶

In an action brought under New York’s antitrust law, the Donnelley Act, a wholesale drug cooperative, Rochester Drug Co-operative (Rochester), alleged that it had been wrongfully terminated as a distributor of defendant’s drug, Avonex, pursuant to a conspiracy between its manufacturer, Biogen Idec US Corp (Biogen), and other Avonex distributors. In granting Biogen’s motion to dismiss, the court in Rochester Drug Co-Operative, Inc v Biogen Idec US Corp¹⁷ held that Rochester had failed to allege facts sufficient to establish an unlawful ‘arrangement’ under the Donnelley Act.¹⁸ Relying on Colgate, the court concluded that Biogen’s purely unilateral termination of the distributorship stated no claim under the Act, since ‘an individual’s refusal to sell to anyone does not amount to prohibited restraint of trade.’¹⁹

Non-price restraints on purchasing

Tying arrangements

Tying claims have been the subject of a number of decisions in the past year. We will look at important decisions addressing coercion and market power.

Coercion

The Court of Appeals for the Fourth Circuit affirmed summary judgment for the operator of a concert venue in It’s My Party, Inc v Live Nation, Inc.²⁰ The plaintiff, It’s My Party, Inc (IMP), alleged that the defendant, Live Nation, Inc (LN), unlawfully tied an artist or group to performing at LN’s outdoor amphitheatre in northern Virginia, Nissan Pavilion, if the artist or group wanted to hire LN for promotion services. IMP operated a competing performance venue, the Merriweather Post Pavilion, and claimed that the tie-in had diverted business away from the Post Pavilion. In reviewing the tying claim, the court focused on whether the evidence established that LN’s customers were coerced into buying the tied service (performance at Nissan Pavilion) as a condition for buying the tying service (LN’s promotion services). The court observed that it is not the ‘bundling of two products together’ that harms competition but rather ‘coercion of the consumer.’²¹ Looking at the evidence, the court held that IMP had failed to show coercion.

The evidence showed that LN-promoted artists and groups chose to perform at the Post Pavilion 14 per cent of the time. The court noted that 10 per cent has been recognised ‘as the minimum benchmark for separate sales sufficient to rebut any inference of tying,’²²and it observed that the non-tied sales ‘exceed it [the benchmark] sufficiently to cast doubt on any allegation of tying.’²³ The court acknowledged that, even in the absence of direct evidence, coercion could be proved circumstantially, and it noted that IMP’s expert economist had offered a regression analysis suggesting that coercion could be the only explanation for why artists on national tours promoted by LN performed ‘disproportionately’ at Nissan Pavilion rather than the Post Pavilion. The court rejected IMP’s argument, holding that a plaintiff must present evidence that tends to exclude the possibility of independent conduct consistent with competition. A plaintiff advancing a tying claim ‘needs to rule out alternative market-based explanations for why the consumer might prefer to purchase the tied product along with the tying product,’²⁴ and IMP had failed to do so.

Market power

In Suture Express, Inc v Owens & Minor Distribution, Inc,²⁵ the court considered whether defendants had power in the market for distribution of disposable, single-use items purchased by hospitals, clinics and other healthcare providers called ‘med-surg’ products. The plaintiff, Suture Express, distributed only two categories of med-surg products – sutures and endo products – whereas Owens & Minor Distribution, Inc (O&M) and Cardinal Health 200, LLC (Cardinal) distributed a full line of products, covering some 30 categories. In response to competition from Suture Express, each of O&M and Cardinal adopted policies giving customers better overall pricing when they purchased suture and endo products from them along with other med-surg products. Suture Express claimed that O&M and Cardinal had unlawfully tied the sale of med-surg products to the purchase of suture and endo products.

In granting summary judgment for defendants, the court rejected Suture Express’s market power contentions. In the relevant period, O&M’s share of the market ranged from 32 per cent to 38 per cent, and Cardinal’s ranged from 27 per cent to 31 per cent. Standing alone, the shares failed to establish market power for either defendant, and the evidence showed that barriers to entry were not high.²⁶ The evidence showed that other firms had grown in relation to O&M and Cardinal and that, as they expanded, ‘O&M and Cardinal’s market shares have declined or remained relatively flat.’²⁷ The fact that other firms bundled sutures and endo products with other med-surg products also argued against possession of market power by the defendants: ‘[D]efendants’ use of bundling terms is not unique among competitors in the market, and this practice fails to establish market power.’²⁸ Whether defendants’ bundling was objectionable under the discount attribution test applied in tying analysis in Collins Inkjet Corp v Eastman Kodak Co²⁹ could not, because of fact issues, be decided on summary judgment, and the court observed that application of the test would be inappropriate in any event, because it had never been applied to pricing by a non-monopolist.³⁰ Because the undisputed facts showed that O&M and Cardinal competed vigorously against another national distributor of med-surg products, regional distributors and each other, ‘no reasonable juror could conclude that defendants have the power exclude competition or control price.’³¹

Exclusive dealing arrangements

Exclusive dealing arrangements continue to provide fertile ground for antitrust litigation. We review recent decisions in which courts have looked at pure exclusive dealing arrangements, as well as partial exclusive dealing arrangements involving loyalty discount programmes.

Pure exclusive dealing

A group of structural steel erecting companies in the Boston area brought an action against a local union in American Steel Erectors, Inc v Local Union No 7³² challenging agreements it had signed with four steel fabricators to deal exclusively with erectors employing union members. The plaintiffs’ employees were non-union, and plaintiffs alleged that the union agreements were unlawful exclusive dealing arrangements that foreclosed them from opportunities in the market for structural steel erection. The record at trial showed, however, that the foreclosed opportunities constituted only a ‘fraction of a per cent’ of the relevant market and that plaintiffs were not excluded from bidding on other jobs.³³ There was no violation of section 1, because the evidence showed only ‘the existence of a handful of sporadic vertical restraints resulting in harm to the plaintiffs, and not the existence of a systemic set of exclusionary restraints resulting in harm to competition in the marketplace for structural steel erection services itself.’³⁴

An importer of heavy construction equipment, International Construction Products LLC (ICP), alleged in International Construction Products LLC v Caterpillar Inc³⁵ that manufacturers having 60 per cent of the US market for heavy construction equipment blocked its access to the market by means of exclusive dealing arrangements with their dealers. ICP alleged that defendants Caterpillar Inc, Volvo Construction Equipment North America, LLC and Komatsu America Corp had imposed ‘all or nothing’ terms on dealers, effectively barring them from handling brands of equipment sought to be sold by ICP in the US.³⁶ In granting defendants’ motion to dismiss ICP’s exclusive dealing claim under section 3 of the Clayton Act,³⁷ the court noted that the complaint did not allege facts to show that ‘a dominant firm barred competitors from entire modes of distribution, or from nearly all cost-effective means of distribution.’³⁸ Because ICP had failed to plead a lack of alternative distribution channels by which it could have reached end-users, and because it had failed to plead facts showing that defendants’ exclusive dealing arrangements substantially foreclosed access to the market, the complaint failed to make out a prima facie case of unlawful exclusive dealing.³⁹

The Federal Trade Commission was confronted with a dramatically different situation in In Matter of Victrex, plc.⁴⁰ There, the Commission looked at distribution practices of Victrex plc and its wholly owned subsidiaries, Invibio Limited and Invibio, Inc (collectively, Invibio), relating to a polymer, called PEEK, contained in implantable devices used in spinal fusion and other medical procedures. According to the Commission’s administrative complaint, Invibio consistently had 90 per cent or more of the worldwide market for PEEK and had monopoly power.⁴¹ In response to entry by Solvay Specialty Polymers LLC and Evonik Corporation into the market in 2010 and 2013, respectively, Invibio tightened and expanded exclusive dealing terms in its supply contracts with medical device manufacturers. The terms took one of three forms: requiring the use of Invibio PEEK for all PEEK-containing devices; requiring Invibio PEEK for a broad category of PEEK-containing devices; or requiring it for a list of specific PEEK-containing devices.⁴²

According to the Commission, Invibio used the contract terms to maintain its monopoly power in the market, and there were ‘no competitive efficiencies [to] justify the scope of Invibio’s exclusionary and anticompetitive conduct.’⁴³ The consent decree to which Invibio agreed requires it to cease and desist from enforcing most of the terms and prohibits it from requiring exclusivity in future contracts.⁴⁴

Partial exclusive dealing.

Unlike the contract terms in a pure exclusive dealing arrangement, contract provisions at issue in partial exclusive dealing cases provide incentives for a customer to source all of its requirements for a given product from a single firm, but they do not require it. Typically, the greater the percentage of the customer’s requirements that are purchased from the firm, the greater the discount or rebate. When the firm employing this type of arrangement – referred to as a loyalty discount – has market power, there can be issues as to whether it causes market foreclosure. We look at two such cases decided in the past year.

The Third Circuit reviewed market share discounts offered by a monopolist in Eisai, Inc v Sanofi Aventis US, LLC⁴⁵ and held that the discounting caused no substantial foreclosure. Sanofi Aventis (Sanofi) made and sold anticoagulant drugs. It offered discounts to a hospital based on the volume of the hospital’s purchases of its requirements for a drug known as a low molecular weight heparin (LMWH). Sanofi gave a hospital a 1 per cent discount if it bought 75 per cent of its needs from Sanofi. As the percentage of its purchases increased, the percentage of discount increased. In 2008, the discounting ranged from 9 per cent to 30 per cent for an individual hospital. Multi-hospital systems were eligible for deeper discounts. Sanofi had 81.5 per cent to 92.3 per cent of the LMWH market. Eisai had the second-largest market share, at 4.3 per cent to 8.2 per cent.

Without differentiating between sections 1 and 2 of the Sherman Act, the court applied the rule of reason. It held that there could be no liability unless the probable effects of the arrangement were to substantially lessen competition, rather than merely to disadvantage rivals. The court noted that (1) the plaintiff must show substantial foreclosure of the relevant market and (2) the court must analyse the likely or actual anticompetitive effects of the arrangement, including whether it resulted in reduced output, increased price or reduced quality.⁴⁶

The evidence did not show any substantial foreclosure resulting from the discount programme. The court pointed out that there was no claim that Sanofi conditioned the discounts on purchases across multiple product lines, and it observed that the bundling analysis in LePage’s v 3M⁴⁷ therefore had no application.⁴⁸ Nothing suggested that ‘an equally efficient competitor was unable to compete with Sanofi,’⁴⁹ and customers had the ability to switch to competing products.

Nor was there evidence of any anticompetitive effects. Sanofi’s customers had the ability to switch to competing products but simply chose not to do so. There was no restriction of consumer choice.⁵⁰

The court separately addressed Sanofi’s argument that the discounting was per se legal under the price-cost test. Under this test, a plaintiff can succeed on a predatory pricing claim only if it shows that (1) the rival’s low prices are below an appropriate measure of its costs and (2) the rival had a dangerous probability of recouping its investment in the below-cost prices.⁵¹ The court observed that the test applies if pricing predominates over other means of exclusivity and that this is usually the case when a firm uses a single-product loyalty discount.⁵² Since the court had already determined that Eisai’s claims failed under the rule of reason, it declined to decide whether the price-cost test should be applied to the facts in the case.⁵³

The court in Universal Hospital Services, Inc v Hill-Rom Holdings, Inc⁵⁴ held that plaintiff had adequately alleged an unlawful exclusive dealing arrangement. The plaintiff alleged that Hill-Rom Holdings, Inc and affiliates (collectively, Hill-Rom) violated section 3 of the Clayton Act by entering into long-term contracts with hospital group purchasing organisations (GPOs) that gave the GPOs steep discounts and rebates for standard hospital beds purchased from Hill-Rom if they exclusively used Hill-Rom beds for their members’ needs for rentals of patient handling equipment (PHE) and moveable medical equipment (MME). Universal Hospital Services, Inc (Universal), a competitor of Hill-Rom in the rental of PHE and MME, alleged that the arrangement caused substantial foreclosure of the PHE and MME rental markets. In denying Hill-Rom’s motion to dismiss, the court relied upon the ‘qualitative-substantiality’ approach for ascertaining whether conduct causes foreclosure. This approach includes consideration of the ‘percentage of market foreclosed by defendant, barriers to entry, terms of the agreement regarding duration, ability to terminate the agreement, other available distribution channels, whether the purchaser is an end user, the nature of the product, actual competitive impacts, justifications, and the seller’s market power.’⁵⁵

The court reasoned that Hill-Rom’s market share of up to 66 per cent in some regional markets and from at least 12 to 15 per cent in the national market was sufficient to state a claim under section 3.⁵⁶ It also noted that the five to 10-year duration of the sole-source contracts with GPOs was far longer than what was standard in the industry, and it turned aside Hill-Rom’s insistence that the contracts could be terminated on short notice. It considered the termination right illusory, because conditional discounts and rebates offered by Hill-Rom to GPOs in return for sourcing exclusively from Hill-Rom ‘are sufficiently steep to create ‘an irresistible bundle’’ that is ‘not economically capable of termination as a practical matter.’⁵⁷

The court held that these allegations were also sufficient to state a claim under section 1 of the Sherman Act,⁵⁸ observing that ‘courts have found that an alleged combination of a defendant’s exclusive volume discounts with loyalty conditions could violate section 1.’⁵⁹

Notes

1. Leegin Creative Leather Prods. v PSKS, Inc., 551 U.S. 877 (2007).
2. 2015 U.S. Dist. LEXIS 168581 (M.D. Fla. 2015).
3. Id. at *20.
4. Id. at *23.
5. Id. at *41.
6. Id. at *48-59.
7. Id. at *59-60.
8. Id. at *69.
9. 112 F.Supp.3d 758 (N.D. Ill. 2015).
10. Id. at 769.
11. Id. at 772 (quoting Republic Tobacco Co. v N. Atl. Trading Co., 381 F.3d 717, 737 (7th Cir. 2004)).
12. Id. at 773. The court noted that defendant’s expert had calculated market share in the range of 2.89 to 9 per cent and observed that the ‘figures are far too small for Peaches to possess market power.’ Id. at 774.
13. United States v Colgate & Co., 250 U.S. 300 (1919).
14. 15 U.S.C. § 1.
15. 797 F.3d 538 (8th Cir. 2015)
16. Id. at 545, quoting Colgate, 250 U.S. at 307.
17. 130 F.Supp.3d 764 (W.D.N.Y. 2015).
18. Id. at 781. The Donnelley Act prohibits a ‘contract, agreement, arrangement or combination’ in restraint of trade. N.Y. Gen. Bus. Law section 340.
19. 130 F.Supp.2d at 770, quoting Dior v Milton, 9 Misc. 2d 425, 442 (N.Y. Sup. Ct.), aff’d, 2 A.D.2d 878 (1st Dep’t 1956).
20. 811 F.3d 676 (4th Cir. 2016).
21. Id. at 684.
22. Id. at 685.
23. Id.
24. Id.
25. 2016 U.S. Dist. LEXIS 47421 (D. Kan. 2016).
26. Id. at *70-72.
27. Id. at *72.
28. Id. at *75.
29. 781 F.3d 264, 275 (6th Cir. 2015).
30. 2016 U.S. Dist. LEXIS 47421 at *75.
31. Id. at *82.
32. 815 F.3d 43 (1st Cir. 2016).
33. Id. at 68.
34. Id. at 70.
35. 2016 U.S. Dist. LEXIS 6826 (D. Del. 2016).
36. Id. at *17.
37. 15 U.S.C. §14.
38. 2016 U.S. Dist. LEXIS 6826, at *20.
39. Id. at *24.
40. FTC, File No. 141-0042, Proposed Decision and Order (April 27, 2016), available at www.ftc.gov.
41. Id., Complaint paragraphs 33, 39, available at www.ftc.gov.
42. Analysis of Agreement Containing Consent Order to Aid Public Comment, File No. 141-0042, at 2, available at www.ftc.gov.
43. Id. at 4.
44. Id. at 1.
45. 821 F.3d 394, 2016 U.S. App. LEXIS 8148 (3d Cir. 2016)
46. 2016 U.S. App. LEXIS 8148, at *13.
47. 324 F.3d 141 (3d Cir. 2003).
48. 2016 U.S. App. LEXIS 8148, at *18.
49. Id. at *20.
50. Id. at *24-25.
51. Id. at *27.
52. Id. at *28.
53. Id. at *29.
54. 2015 U.S. Dist. LEXIS 154154 (W.D. Tex. 2015).
55. Id. at *38 (citation omitted).
56. Id. at *40-41.
57. Id. at *44.
58. 15 U.S.C. section 1.
59. 2015 U.S. Dist. LEXIS 154154, at *45.