Opinion ID: 700613
Heading Depth: 2
Heading Rank: 1

Heading: Actual Adverse Effect on Competition

Text: 8 Under Sec. 1 of the Sherman Antitrust Act, [e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal. 15 U.S.C. Sec. 1. KMB alleges that defendants violated Sec. 1 by stifling service and price competition in the Tri-state market for exhaust products. We analyze this sort of allegedly anticompetitive practice--a vertical conspiracy that does not involve price-fixing--according to the rule of reason. See Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 59, 97 S.Ct. 2549, 2562, 53 L.Ed.2d 568 (1977). Under this rule, the factfinder weighs all of the circumstances of a case in deciding whether a restrictive practice should be prohibited. Id. at 49, 97 S.Ct. at 2557. 9 Establishing a violation of the rule of reason involves three steps. [P]laintiff bears the initial burden of showing that the challenged action has had an actual adverse effect on competition as a whole in the relevant market.... Capital Imaging Assocs., P.C. v. Mohawk Valley Medical Assocs., 996 F.2d 537, 543 (2d Cir.), cert. denied, --- U.S. ----, 114 S.Ct. 388, 126 L.Ed.2d 337 (1993). If the plaintiff succeeds, the burden shifts to the defendant to establish the pro-competitive 'redeeming virtues'  of the action. Id. Should the defendant carry this burden, the plaintiff must then show that the same pro-competitive effect could be achieved through an alternative means that is less restrictive of competition. Id.; Bhan v. NME Hosps., Inc., 929 F.2d 1404, 1413 (9th Cir.), cert. denied, 502 U.S. 994, 112 S.Ct. 617, 116 L.Ed.2d 639 (1991).
10 The district court in this case concluded that KMB failed to meet its initial burden of showing an actual adverse effect on competition as a whole in the relevant market. In order to fulfill this requirement, the plaintiff must show more than just that he was harmed by defendants' conduct. See Oreck Corp. v. Whirlpool Corp., 579 F.2d 126, 133-34 (2d Cir.) (That another customer of the defendant convinced the defendant to cease dealings with plaintiff did not suffice to show anti-competitive effect.), cert. denied, 439 U.S. 946, 99 S.Ct. 340, 58 L.Ed.2d 338 (1978); Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 488, 97 S.Ct. 690, 697, 50 L.Ed.2d 701 (1977) (The antitrust laws ... were enacted for 'the protection of competition not competitors.'  (citation omitted)). Therefore, that KMB may have lost a potentially lucrative contract with Walker is not sufficient to state a cognizable antitrust claim. 11 To prevail on a Sec. 1 claim, a plaintiff must also show more than just an adverse effect on competition among different sellers of the same product (intrabrand competition), in this case Walker exhaust equipment. See Borger v. Yamaha Int'l Corp., 625 F.2d 390, 397 (2d Cir.1980) (reversible error to instruct the jury to find defendant liable solely on the basis of a purpose to restrict intrabrand competition, without any finding of either a purpose or effect related to interbrand competition). Restrictions on intrabrand competition can actually enhance market-wide competition by fostering vertical efficiency and maintaining the desired quality of a product. See Continental T.V., 433 U.S. at 54-55 & n. 23, 97 S.Ct. at 2559-60 & n. 23; Eiberger v. Sony Corp. of Am., 622 F.2d 1068, 1075-76 (2d Cir.1980). Because the focus of our inquiry is the relevant market as a whole, restriction of intrabrand competition must be balanced against any increases in interbrand competition. Eiberger, 622 F.2d at 1076; Copy-Data Sys., Inc. v. Toshiba Am., Inc., 663 F.2d 405, 411 (2d Cir.1981). The overarching standard is whether defendants' actions diminish overall competition, and hence consumer welfare. Graphic Prods. Distribs. v. Itek Corp., 717 F.2d 1560, 1571, 1573 (11th Cir.1983).
12 We agree with the district court that KMB has failed to satisfy the adverse-effect requirement. As Judge Sand noted, KMB cannot show that the impact on intrabrand competition was anything but de minimis. KMB's proof on this point consists almost entirely of affidavits from twelve of its current customers stating that they prefer both Walker products and KMB's superior service. Such isolated statements of preference are not a sufficient empirical demonstration concerning the [adverse] effect of the [defendants'] arrangement on price or quality, Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 30 n. 49, 104 S.Ct. 1551, 1567 n. 49, 80 L.Ed.2d 2 (1984), to state a Sec. 1 claim. See id. at 30, 104 S.Ct. at 1567 (finding inadequate evidence of an actual adverse effect on competition even though [t]he evidence indicates that some surgeons and patients preferred respondent's [anesthesiology] services). 13 In fact, an examination of the intrabrand market belies even KMB's assertion that intrabrand competition has been harmed. There are over twenty Walker distributors of various size in the Tri-state area. All the evidence suggests that there is a highly competitive intrabrand market in Walker products; in fact, during the pendency of this case, prices for Walker products have apparently fallen and distributors' discounts have increased. The fact that KMB was not permitted to compete in this market does not alone prove an adverse effect on intrabrand competition. See Capital Imaging, 996 F.2d at 546 (Sec. 1 claim fails where plaintiff conceded that price would stay the same were it allowed to enter the market); Balaklaw v. Lovell, 14 F.3d 793, 798-99 (2d Cir.1994) (finding plaintiff's claim insufficient because, [f]rom the consumers' point of view, nothing about the market ha[d] changed even though plaintiff was not permitted to compete). 14 Moreover, and critical to our decision, KMB has offered no evidence of an adverse effect on the whole Tri-state interbrand exhaust-product market. The only clear effect of defendants' alleged conspiracy was to prevent KMB from carrying Walker products. After it learned that it could not join the ranks of Walker distributors, KMB continued to compete with that group by offering AP exhaust products to jobbers. KMB was able to do so--rather successfully, in fact--by offering superior pricing and service to counteract what it considers the higher quality of Walker parts. In this very tangible sense, defendants' refusal to allow KMB to change over to Walker products tended to promote rather than curtail interbrand competition. KMB has thus failed to come forward with any evidence that defendants' actions adversely affected service, quality, or price market-wide. 15
16 KMB argues that, even if it cannot show an actual adverse effect on competition, it can meet its initial burden under Sec. 1 simply by showing that defendants possess sufficient market power to cause an adverse effect on competition. It then challenges the district court's conclusion that KMB's showing of Walker's market power was insufficient to survive summary judgment. We conclude that the showing of Walker's market power was insufficient in this case to satisfy KMB's burden of establishing an adverse effect on the market as a whole. 17 The proper role of market power in the Sec. 1 rule of reason analysis has been characterized differently by the various circuits. Some courts require that a plaintiff always show the defendant's market power in order to state a Sec. 1 claim. See, e.g., Rothery Storage & Van Co. v. Atlas Van Lines, Inc., 792 F.2d 210, 221 (D.C.Cir.1986) (suggesting that a showing of market power is a strict prerequisite to recovery in all Sec. 1 cases), cert. denied, 479 U.S. 1033, 107 S.Ct. 880, 93 L.Ed.2d 834 (1987); General Leaseways, Inc. v. National Truck Leasing Ass'n, 744 F.2d 588, 596 (7th Cir.1984) (making such a showing a prerequisite to recovery); Graphic Products, 717 F.2d at 1568. The reasoning underlying this requirement is that unless a firm has the ability to raise unilaterally prices and profitably maintain those prices above competitive levels and/or restrict output in the market, State of New York by Abrams v. Anheuser-Busch, Inc., 811 F.Supp. 848, 871 (E.D.N.Y.1993), anticompetitive behavior will merely put the firm at a competitive disadvantage in the market as a whole and will not harm consumer welfare. Capital Imaging, 996 F.2d at 546. 18 This court has not made a showing of market power a prerequisite for recovery in all Sec. 1 cases. If a plaintiff can show an actual adverse effect on competition, such as reduced output, FTC v. Indiana Fed'n of Dentists, 476 U.S. 447, 460-61, 106 S.Ct. 2009, 2018-19, 90 L.Ed.2d 445 (1986), we do not require a further showing of market power. Capital Imaging, 996 F.2d at 546. However, where the plaintiff is unable to demonstrate such actual effects--as KMB is unable to do here--it must at least establish that defendants possess the requisite market power and thus the capacity to inhibit competition market-wide. Capital Imaging, 996 F.2d at 546. 19 Market power has been defined as the ability to raise price significantly above the competitive level without losing all of one's business. Graphic Prods., 717 F.2d at 1570; see also Broadway Delivery Corp. v. United Parcel Serv., 651 F.2d 122, 126-27 (2d Cir.) (defining the market power as the power to control prices or exclude competition in the context of a monopolization claim under Sec. 2 of the Sherman Act), cert. denied, 454 U.S. 968, 102 S.Ct. 512, 70 L.Ed.2d 384 (1981). Market power may be shown by evidence of specific conduct indicating the defendant's power to control prices or exclude competition. Id. at 130. In addition, market share may be used as a proxy for market power. See id.; Graphic Prods., 717 F.2d at 1570. 20 The district court held that KMB failed to establish Walker's market power. KMB did not introduce any direct evidence of Walker's ability to affect prices in the aftermarket for automotive exhaust products. As to market share, KMB submitted evidence that Walker's national market share is approximately sixty percent. Its only evidence of area market share, however, consisted of answers from two deposed Walker employees agreeing that Walker's share of the area market is probably in line with its share of the national market. 21 We need not decide whether such assertions as to a defendant's share of the relevant market create a genuine issue of material fact sufficient to survive summary judgment. Even if market power were shown, it would not satisfy the adverse-effect requirement under these circumstances. When we said in Capital Imaging that a plaintiff wishing to show adverse effect through indirect means must at least establish that defendants possess the requisite market power, Capital Imaging, 996 F.2d at 546 (emphasis added), we meant that a showing of market power, while necessary to show adverse effect indirectly, is not sufficient. There must be other grounds to believe that the defendant's behavior will harm competition market-wide, such as the inherent anticompetitive nature of defendant's behavior or the structure of the interbrand market. See Graphic Prods., 717 F.2d at 1573 (In order to show adverse impact indirectly, a plaintiff must show defendant's market power, that intrabrand competition was impeded, and that the interbrand market structure was such that intrabrand competition was a critical source of competitive pressure on price, and hence of consumer welfare.); cf. 8 Philip Areeda, Antitrust Law p 1600d, at 10 (1986) (The large market share of a dominant manufacturer does not itself make his restraint on intrabrand competition unreasonable.). This position is consistent with the approach of courts that require a showing of market power, but only as one of several steps necessary to establish adverse effect. See, e.g., Davis-Watkins Co. v. Service Merchandise, 686 F.2d 1190, 1202 (6th Cir.1982), cert. denied, 466 U.S. 931, 104 S.Ct. 1718, 80 L.Ed.2d 190 (1984). 22 Here, KMB has not offered adequate reasons why we should infer an adverse effect on competition simply from Walker's alleged market power. KMB has not shown that defendants' actions have had a detrimental effect even on intrabrand competition. To the contrary, the evidence suggests that intrabrand competition is healthy and that interbrand competition is even healthier. We therefore conclude that, despite its efforts to prove Walker's market power, KMB has failed to show an adverse effect on competition as a whole.
23 KMB also contends that it has met the adverse-effect requirement by producing evidence of defendants' anticompetitive intent. Intent is relevant to the reasonableness inquiry, but only to help courts interpret the effects of defendants' actions. Anheuser-Busch, 811 F.Supp. at 874. Like market power, anticompetitive intent is not by itself sufficient to meet the adverse-effect requirement. See Chicago Bd. of Trade v. United States, 246 U.S. 231, 238, 38 S.Ct. 242, 243-44, 62 L.Ed. 683 (1918) (noting that intent is relevant in the antitrust context, but not because a good intention will save an otherwise objectionable regulation or the reverse  (emphasis added)); cf. Capital Imaging, 996 F.2d at 543 (citing id.). Without some evidence of an adverse impact on competition in either the interbrand or intrabrand market, the fact that customers induce a seller to refrain from dealing with another potential customer in order to limit competition does not satisfy a plaintiff's initial burden under Sec. 1. See Oreck, 579 F.2d at 133-34 (Plaintiff failed to show anticompetitive effect even though plaintiff's competitor convinced defendant to stop selling to plaintiff.). KMB's evidence of defendants' intent, even belief that what they were doing might be unlawful, is unavailing in the absence of evidence of anti-competitive effect.