# United Stat es Court of Appeals For the First C ircuit

No. 02-2391 EASTERN FOOD SERVICES, INC., Plaintiff, Appellant,

v. PONTIFICAL CATHOLIC UNIVERSITY SERVICES ASSOCIATION, INC.,

and COCA COLA PUERTO RICO BOTTLERS, INC.,

Defendants, Appellees.

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF PUERTO RICO [Hon. Jay A. García-Gregory, U.S. District Judge ]

Before Boudin, Chief Judge , Torruella and Howard, Circuit Judges . Pedro Jiménez with whom Kata rina Stipec-Rubio and Correa, Collazo, Herrero, Jiménez & Fortuño were on brief for appellant. Luis A. Oliver-Fraticelli with whom Diego A. Ramos and Fiddler, González & Rodríguez P SC were on brief for appellee Pontifical Catholic University Services Association, Inc. Néstor M. Méndez-Gómez with whom Oreste R. Ramos and Pietrantoni Méndez & Alvarez LLP were on brief for appellee Coca Cola Puerto Rico Bottlers. January 20, 2004-2- BOUDIN, Chief Judge . This is an appeal by Eastern Food Services, Inc. ("Eas tern ") from the dismissal of its antitrust suit. The defendants in the district court were Pontifical Catholic Unive rsity of Puerto Rico Services Association, Inc., ("UniversityServices") and Coca Cola Puer to Rico Bottlers, Inc. ("Coca Cola"). Because dismissal was on the complaint, we take the factual allegations of the complaint as true for purposes of this appeal. Martin v. Applied Cellular Tech ., In c. , 284 F.3d 1, 5-6 (1st Cir. 2002).

Eastern is a company based in San Juan, Puerto Rico, engagedin distributing food and beverage products in Puerto Rico; this includes sales through cafeteria operations and food and beverage machines. Pontificia Universidad Católica de Puerto Rico is a university based in Ponce, Puerto Rico; University Services is

a related entity that provides ancillary services for the univ ers ityand has control over its cafeteria and other food distribution points.

In 1997, Eastern and University Services entered into a three -year contract, extendable to five years, whereby Eastern agreedto operate the cafeteria at the university and was given, for specified payments, the exclusive concession (with a few narrow exceptions) for other food and beverage distribution inside the university. East ern allege s that in 1998, in order to secure a donation from Co ca C ola to the university, University Services-3-

allow edCoca Cola to place its own food and beverage machines on the campus and told Eastern to have the machines it was using removed. There were negotiations between the parties as to this andother matters. Ultimately, University Services terminated the contract, claiming that Eastern had breached its provisi ons in vari ous respects; Eastern made similar claims against University Servic es. Asserting that it made large investments in reliance upon the contract, Eastern brought the present suit in federal distri ct cou rt in 1999 against both University Services and Coca Cola. Although the complaint asserts contract, tort, and other claims under local law (and University Services filed a counterclaimbased on breach o f cont ract), our concern is solely with Eastern's claim based upon section 1 of the She rman Act, 15 U.S.C. § 1 (2000). This claim alleged a conspiracy by the two defendants, through unfair business practices, to eliminate competition by Eastern in the supply of food and beverage service within t he uni versity. This was, according to the complaint, unlawful per se and under the rule of reason.

The district court dismissed the antitrust claim on the merits. The ruling most important to this appeal was that the complaint failed to allege a valid geographic market; the district judge said that Eastern's alleged geographic market–-the-4-

university–-was "extremely narrow" and not "large enough so as to consti tute an economically significant area of commerce." The local law claims were dism isse d without prejudice to their assertion in Puerto Rico's courts. This appeal followed.

Our review of a dismissal for failure to state a claim is de novo. Martin , 284 F. 3d at 5-6. In additi on t o accepting as true the facts alleged in the complaint, we draw reasonable inferences in favor of the non-moving party. Id . Nevertheless, we conclude that this is essentiallya contract dispute with possible attendant tort claims; and it is not a plausible antitrust case, however tempting may be the lure of treble damages and attorney's fees. In substance, Eastern alleges that it had from t h e university, through its services auxiliary, something close to an exclusive contract to provide food services on the university campus, and that after receiving a large don ati on for the university from Coca Cola, University Services broke the contract in order to transfer to Coca Cola exclusive rights to a part of Eastern's domain, namely, the ve ndin g machine portion of the business on the campus. Indulging all inferences in favor of Eastern, we will assume that Coca Cola was complicit in the breach.

The line is not always clear between antitrust violations andordinary business wrongs, such as breach of contract or tortiou s i nterference. Indeed, both antitrust and ordinary-5-

contract or tort claims may sometimes arise out of the same body of conduct, see Hayes v. Solomon , 597 F.2d 958, 973 (5th Cir. 1979), cert. denied , 444 U.S. 1078 (19 80); IIIA Areeda & Hovenkamp, Antitrust Law , ¶ 782a (1996); imagine a near monopolist who burns down the plant of his on ly co mpetitor. But antitrust claims are concernednot with wrongs directed against the private interest of an individual business but with conduct that stifles competition. Brown Shoe Co. v. United States , 370 U.S. 294, 344 (1962).

From the outset, Eastern's description of what happened raises warning flags for anyone familiar with antitrust law. The university, like most landlords, controls who may set up shop on its premises. It could act as the sole on-campus supplier of food and beverages, allow multiple suppliers, or give exclusive access to one supplier. Here, before the dispute, Eastern was virtually the sole supplier of food and beverages; after, Coca Cola has exclusive control of the vending machine portion of the business.

In all events, antitrust doctrine does not operate by purelyad hoc judgments as to whether an action adds to or detracts fromcompetition. Section 1 of the Sherman Act makes unlawful contracts, combinations andconspiracies in restraint of trade and the courts have developed algorithms for implementing this generalization. The easiest way is for t he plainti ff to show a "per se" violation, that is, that the challenged conduct falls within a small set of acts regarded by courts as sufficiently1 "Naked" means unconnected with any redeeming larger

enterprise. See White Motor Co. v. United States , 372 U.S. 253, 263 (1963). Compare Northwest Whol esale Stationers v. Pacific Stationery & Printing Co. , 472 U.S. 284, 295-98 (1985); Broadcast Music, Inc. v. Columbia Broadcasting System, Inc. , 441 U.S. 1, 20- 21 (1979). -6- danger ous, and so clearly without redeeming value, that they are condemnedout of hand–-that is without a showing of wr ong ful purpose, power or effect. See United States v. Socony-Vacuum Oil Co. , 310 U.S. 150 (1940).

Almost the only important categories of agreements that reliablydeserve this label today are those among competitors that amount to "naked" price fixing, output restriction, or division of customers or territories. Augusta News Co. v. Hudson News Co. , 269 F.3d41, 47 (1st Cir. 2001). 1 Agreements between a supplier and a buyer as to a minimum resale price remain per se unlawful, id. , but that category is a narrow one. In this case Eastern invokes a different category of agreements sometimes labeled per se, namely, concerte dr efusals to deal or group boycotts. E.g. , Fashion Originators Guild of Am., Inc. v. FTC , 312 U.S. 457, 465-67 (1941).

As to this last category, the label is deceptive because lots of arrangements that might literally be describedas agreements not to deal are not per se unlawful. A co m mon arrangement that involves an agreement not to deal but is fa r from unlawful per se is the exclusive dealing contract ( e.g. , a sole supplier contract,

a exclusive territorial franchise for an outlet). Such arrangements2 Eastern's concern with the fact that Coca Cola may have paid

up-front a large sum for the contract in the form of a supposed donation to the university is a red herring. Whether the universityis compensated by up-front payments, rent, or royalties (or by c onstru ction work allegedly wrung out of Eastern) affects not the competitive impact but merely the form and amount of compensation for the exclusive contract. -7- can be attacked under the rule of reason-- i.e. , on their facts--but

are not per se violations. Tampa Elec. Co. v. Nashville Coal Co. , 365 U.S. 320, 327 (1961).

Tho se refusals to deal arrangements that are treateda s per se violations are "h orizont al," that is, they are agreements between competitors . See U.S. Healthcare, Inc . v. Healthsource, Inc. , 986 F.2d 589, 593-94 (1st Cir. 1993). (Even then, not all such h oriz ontal arrangements are subject to per se treatment or necessarilyviolate the antitrust laws, e.g. , Northwest Stationers , 472 U.S. at 295-98.). An entity that grants an exclusive franchise is ordinarily in a vertical, not a horizontal, relationship with the grantee. XI Hovenkamp, Antitrust Law¶ 1800a (1998).

What is alleged here is nothing other than an exclusi v e dealing arrangement bywhich one supplier--Coca-Cola--is given the sole right by the university to supply and stock ve nding m achines

on campus. 2 Eastern was i tself the beneficiary of just such a contract--indeed, a broa der o ne since it included other on-campus fooddistribution--un til i t was terminated. There might be cir cumstances in which exclusivity was unlawful for Coca-Cola bu t-8-

not for Eastern; but in neither case does such a contract fall into the category of a per se violation.

To show an antitrust violation in the tran sfer of exclusive rights from Eastern to Coca Cola, Eastern had to commit itself to show that the new arrangement would have anti-competitive effects outweighing the legitimate economic advantages that it might provide. U.S. Healthcare , 986 F.2d at 595; see Fraser v. Major League Soccer , 284 F.3d 47, 59 (1st Cir. 2002), cert . denied , 537 U.S. 885 (2002). This is usually a demanding an d fact- intensive process, cf. Tampa E l ec. Co. , 365 U.S. at 329, which is why plaintiffs almost always allege a per se violat ion where they can do so. But plaintiffs are free to urge per se and non-per se theories at the same time. U.S. Healthcare , 986 F.2d at 593.

Virtuallyalways, anti-competitive effects under the rule of reason require that the arrangement or action in question create

or enhance market pow er--meaning the power to control prices or exclude competition. IIA Areeda & Hovenkamp, Antitrust Law , ¶ 501 (2ded. 2002). This is not necessaril y enough to condemn the conduct--benefits mayoutweigh detriments, see Northwest Wholesale Stationers , 472 U .S. at 295-98 (1985); Broadcast Music, Inc. , 441 U.S. at 2 0-21--b ut absent market power there is ordinarily no detriment andno reason to engage in any weighing. Oksanen v. Page Mem'l Ho sp. , 945 F.2d 696, 709 (4th Cir. 1991), cert. denied , 502 U.S. 1074 (1992).-9- Thus, the identification of market power is ordinarilythe first step in any rule of re ason claim under section 1. U.S. v. Visa, U.S.A., Inc. , 344 F.3d229, 2 38 (2d Cir. 2003); Valley Liquors, Inc. v. Renfield Importers, Ltd. , 8 22 F.2d 656, 666 (7th Cir. 1987), cert. denied , 484 U.S. 9 77 (198 7). This in turn requires the identification of some economic market in which power

can be measured and th e conse quences of the act or transaction assessed. Indeed, "virtually all courts applying the rule of reason

re q uire the plaintiff to define the product and geographic market in which competition is allegedly restrained . . . ." VII Areeda, Antitrust Law¶ 1503b, at 376 (1986).

So how is market power to be assessed? As to power over price, t he conv entional way is to determine whether the relevant actor or combination has a sufficient percentage s h are of a "relevant market" to give it or them power to raise price over cost without losing so many customers as to defeat the effort. Toddv. Exxon Corp. , 275 F.3d 191, 199 (2d Cir. 20 01) . Where exclusion rather than exploitation is the concern, market share figures help gauge the potential impact of restrictive conduct on suppliers or purchasers. See Tampa Elec. Co. , 365 U.S. at 327. A defendant's high share is only a presumptive ba sis for inferring market power (entrybarriers to the market may be very low); but a low share is almost always an indication that the defendant lacks market power.-10- Here, perhaps University Services has power in an economic market: after all, it can set the prices charged students for food simplyby making itself the sole distributor. In fact, whether it has power to raise price to a non-competitive level depends on how easyit is for students to find other nearby food suppliers. In any event, if the university has power to charge high prices to those

on campus, it can be exploi ted wit hout regard to whether it contracts with Coca Cola or Eastern or does the job itself.

Bycontrast, competition in the market to supplyvending services--note that this is a different market--could in theory be affectedby a long-term excl u sive franchise contract between the universityand Coca Cola: suppose East ern were the only food distributor in Puerto Rico beside Coca Cola and the latter's longtermcontracts with various outlets deprivedEastern of the minimum number necessary to its survival. U.S. Healthcare , 986 F.2d at 595. Even then, one wouldhave to consider whether Eastern could feasibly create newoutlets by itself. Posner, Antitrust Law 251-52 (2d ed. 2001). In all events, so far as Eastern's competitive access to customers is concerned, the key qu estion in market definition is what other customers Eastern and its competitors can supply and with what. H ere, Ea stern described in its complaint the product as vending machine sales and the geographic area of competition as the universitycampus. The district court in dismissing the complaint-11-

thought that the former was not a meaningful product and the latter

was too small and narrowly defined to be a re alistic geographic market. We can confine ourselves here to the geographic market and

assume arguendo that sup p lying food or beverages through vending machines might be a legitimate p roduct for purposes of market anal y sis. See Allegheny Pepsi-Cola Bottling Co. v. Mid-Atlantic Coca-Cola Bottling Co. , 690 F.2d 411, 412 n.1 (4th Cir. 1982). We also put aside any suggestion that vending sales in the university

are too small in dollar terms to be of interest to the Sherman Act. Perhaps Section 1 includes a de minimis dollar requirement based on the interstate commerce element of the offe nse, Hammes v. AAMCO Transmissions , Inc. , 33 F.3d 774, 780-81 (7th Cir. 1994) (Posner, J.); IA Areeda & Hovenkamp, Anti trus t Law , ¶ 266e, at 296-300 (2d ed. 2000); but such a requirement, even if it exists, is low, Summit Health, Ltd. v. Pinhas , 500 U.S. 322, 329 n.10, 329-33 (1991), and nothing before us suggests that the dollar volume of vending sales on campus is trivial .

The more important question is the p e rcentage of the market represented by the universi ty. Co nsider that if food and beverage vending within the university is but a modest fraction of all food and beverage vending distribution in Ponce and Eastern can

serve the Ponce area, then foreclosure of the campus segment of the market, even by giving Coca Cola the university franchise for a long-12-

period, cannot prevent Eastern from distributing through other vending machine outlets. This is just another way of saying that, except in sp ecial circumstances, a contract restricting a small percenta ge of a larger available market will have no anticompetitive effect on that market.

Here, to put matters in a nu tshell, the district court

sa idthat the university was obviously a small portion of the distribution market, measuredgeographically. Eastern says that the district court hadno business making this determination on a motion to dismiss; there is, after all, nothing in the com plaint that establishes that Eastern andother vending machine suppliers operate in a larger market. Eastern also says that even i f the district court co uld rej ect the university as a valid economic market for distribution, Eastern was still entitled to a fall-back opportunity to conduct discovery to identify some broader but mo re plau sible market in which foreclosure might still be significant.

As to the first issue, the district court was entitled to take notice that Ponce is a major city in Puerto Rico and, as a matter of co mmon ex perience, to recognize that food and beverage machines are customarily accessible at a host of public andbusiness points within cities. The idea that one universit y campu s represents even a majority of the vending machine sales in a large cityis so improbable that Eastern's own brief m akes no such3 In fact, the students represen t at m ost a few percentage

points in Ponce's population. According to its web cite, Ponce (Puerto Rico's second largest city) has about 194,000 people; and a web site for colleges (xap.com) reports the student population of the university as 7,150. Conceivably, such precise information amounts to adjudicative facts subject to Fed. R. Evid. 201; but in anyevent the data bear out the background inferences drawn in the text. -13- suggestion. 3 Quite possibly(note Eastern's location in San Juan) distri bution is an island-wide business, but it is enough that i t is at least municipal.

Eastern does say that for students and facultythe campus maybe a geographic market in which they pu rchase snacks and beverages, and we wouldnot rule out this possibility without more information about student habits and nearby locations. See MoralesVillalobos v. Garcia-Llorens , 316 F.3d 51, 54-55 (1st Cir. 2003). But, as noted, this student-faculty market, even if real, is already captiv e to th e university and a change in exclusive distributors does not fu rther restrict it. Eastern, by contrast, could be affectedby being excluded fromthe campus, but it is a distributor which, if it can serve the university, is also capable of serving other outlets in Ponce.

At oral argument, Eastern's counsel said that his client didn ot n eed to identify the geographic and product market in the complaint and could have merely alleged anti-competitive effects in "a v alid ec onomic market." Even if this were so--and different views mi gh t be taken on this issue--it would be no excuse for-14-

sustaining a complaint that had shown itself to be inadequate based

on the drafter's candor. Jackson v. Marion County , 66 F.3d 151, 153 (7th Cir. 1995) (Posner, J.). The time of judges and lawyers is a

scarce resource; the sooner a hopeless claim is sent on its way, the more time is available for plausible cases.

This brings us to Eastern's fall-back position; as already noted, Eastern argues that even if its initial claim was doomed, it

was entitled to add new allegatio ns to t he complaint, conduct discoveryor both--aimed at developing other market definitions or theories of antitrust viol ation. Specifically, Eastern says that in opposing the motion to dismiss, it told the district court that it might eventually urge that the market was all of Ponce o r even island-wide, depending upon what discovery revealed.

This argument has several variations, and we st art w ith the easiest, namely, the possibility of amending the co mplai nt. Once the adversary has answered, amendment is no longer allowed as of righ t, Fed. R. Civ. P. 15(a), but in general permission is libe rally g ranted where there is no prejudice. FDIC v. Consol. Mortgage andFin. Corp. , 805 F.2d 14, 16 (1st Cir. 1986). It is often granted no t only pretrial but after a dismissal for failure to state a claim where the court thinks th a t the case has some promise and there is some excuse for the d elay. See 6 Wright & Miller, Federal Practice and Procedu re § 14 88, at 652-69 (2d ed. 1990).-15- Refusals to all ow am endment are reviewed only for abuse of discretion, Resolution Trust Corp. v. Gold , 30 F.3d 251, 253 (1st Cir. 1994), but district judges do not custo marily aim to defeat validclaims. Here, little had occur red at the time of dismissal beyondthe filing of motion papers. It is a fair guess t h at if Eastern had moved to amend the complaint after the dismissal andhad offeredthe court some hope of an amendment raising a plausible antitrust claim, amendment would have been allowed. But Eastern did not move to amend and, even now, it neither has a plausible case nor understands what one would require.

Despite so m e initial confusion, today exclusive dealing contracts are not disfavored by th e an titrust laws. Compare StandardOil Co. of Cal. v. United States , 337 U.S. 293, 306-07, 313-14 (1949), with Tampa Elec. Co. , 365 U.S. at 334, and Jefferson Parish Hosp. Dist. No. 2 v. Hyde , 466 U.S. 2, 45 (1984) (O'Connor, J., concurring). Rather, it is w idely recognized that in many circumstances they may be highly efficient--to assure supply, price stability, outlets, investment, best efforts or the like--and pose

no competitive threat at all . XI H ovenkamp ¶¶ 1810-1814b. Ordinarily, such agreements pose a threat to competition only in4 See Jefferson Parish , 466 U.S. at 45 (O'Connor, J.,

concurring ) ("Exclusive dealing is an unreasonable restraint on trade only when a significant fraction of buyers or sellers are frozen out of a market by the exclusive deal."); Roland Machinery Co. v. Dresser Indus., Inc. , 749 F.2d 380, 394 ( 7th Cir. 1984) (Posner, J.) ("[A] plaintiff must prove . . . that an exclus iv e dealing arrangement is . . . . likely to keep at least one competitor of the defendant from doin g busi ness in a relevant market."). -16- very discrete circumstances, 4 and much sweat and tears have gone into identifying these criteria. Id. at ¶¶ 1802-1807, 1821.

The best example of a possible threat to com p etition exists where a market is already heavily concentratedand long-term exclusive dealing contracts at either the supplier or distribution

en dforeclose so large a percentage of the available sup ply o r outlets that entry into the concentrated mar ket i s unreasonably constricted. Even here there will normally be n o serio us effects in certain conditions ( e.g. , the contracts are for short terms, new entry at the supplier or outlet business allegedly restrained is easy), but, at a minimum, substantial foreclosure is essential and existing concentration important. See U.S. Healthcare , 986 F.2d at 597; Barr Lab s . v. Abbott Labs. , 978 F.2d 98, 111 (3d Cir. 1992); cf. XI Hovenkamp ¶ 1821b-c, at 160-64 .

There is no indication that Eastern has anyhope o f showing substantial foreclosure in a properly defined market. Yes, Eastern might well show that supply of pro duct s through vending machines is a geogra p hic market that is municipal, regional or island-w id e: likely it is one of these. But Eastern does not5 E.g. , Morales-Vallellanes v. Potter , 339 F.3d 9, 14 (1st Cir.

2003); Kileyv. Ratheon Co. , 105 F.3d 734, 735 (1st Cir. 1997); Am. Nurses Ass'n v. State of Il lino is , 783 F.2d 716, 727 (7th Cir. 1986) .

6 E. g. , Aulson v. Blanchard , 83 F.3d 1, 3 (1st Cir. 1996); McCoyv. Ma. Inst. of Tech. , 950 F.2d 13, 22 (1st Cir. 1991), cert. denied , 504 U.S. 910 (1992); Gooleyv. Mobil Oil Co rp. , 851 F.2d 513, 514 (1st Cir. 1988). -17- remotelysuggest that so many potential outle t s are foreclosed to it or other competitor s by long-term exclusive dealing contracts

or other tactics t hat survival or new entry is infeasible. Being in the distributor business, it ought to know enough to make such an allegation if it were true.

This brings us to the separate and more difficult subject of allowing discovery without insisting upon an amendment. The federal rules adopt so-called notice pleading--a "sho rt and plain st atem ent of the claim," Fed. R. Civ. P. 8(a)--and the case books

are full of generalizations seemingly helpfu l to Eastern: that evidence n eed not be pled; that discovery is available both to refine claims and to support them; and that claims will be allowed to go fo rward upon a wrong theory or no theory at all so long as

so me set of facts encompassed by the complaint would allow recovery. 5 Yet the cases als o say that it is not enough merely to allege a violation in conclusoryterms, that the complaint must make out the rudiments of a valid claim, and tha t discovery is not for fishing expeditions. 6 Often, such sets of dueling over-statements-18-

mean that the pertinent variables are too numerous, and the circumstances too various, to reduce the law to a formula; usually, the outcome turns on m atters of degree. In all events, discovery is an expensive and burdensome process , and at every stage is subject to control as a matter of sound judicial judgment.

Nothing here suggests that d iscove ry would be remotely prod uctive , apart from the random (and insufficient) possibility that rummaging through Coca Cola's files wouldproduce evidence of

so me whol ly unknown violation. What Eastern mainly says it wants to discover is information about market definition, a ma tter on

w hich it should already have a good grasp since it is in the bu siness. The further circumstances that would be needed t o mak e out a half -way decent exclusive dealing claim ( e.g. , widespread foreclosure and concentration) are ones whose existence is not even hinted at by Eastern.

In this case, four years a fter th e filing of the complaint, there continues to be no hint of a coherent and promising antitrust claim. The case remains what it was from th e start: a contract and tort case concerned not about wheth e r an economic market will become less competitive but about which of two companies will have exclus ive access to supply vending machine food and beverages on a single campus. Eastern may or may not h ave decent claims under local law but it has no claim arising under the Sherman Act.-19- Affirmed .