Opinion ID: 3012576
Heading Depth: 3
Heading Rank: 1

Heading: Bundled Rebates

Text: LePage's primarily complains of 3M's use of bundled rebates. While we have held that rebates on volume purchases are lawful, see Advo, Inc. v. Philadelphia Newspapers, Inc., 51 F.3d 1191, 1203 (3d Cir. 1995), LePage's seeks to avoid that principle by pointing out that 14 3M offered higher rebates if customers met their target growth rate in different product categories, in effect linking the sale of private label tape with the sale of other products, such as Scotch tape, which customers had to buy from 3M. Thus, LePage's explains: 3M understood that, as a practical matter, every retailer in the country had to carry Scotch-brand tape . . . . It therefore decided to structure its rebates into bundles that linked that product with the product segment in which it did face competition from LePage's (second-line tape) . . . . To increase the leverage on the targeted segment, 3M further linked rebates on transparent tape with those for many other products . . . . The rival would have to `compensate' the customer for the amount of rebate it would lose not only on the large volume of Scotch-brand tape it had to buy, but also for rebates on many other products purchased from 3M.5 Br. of Appellee at 40. As we have suggested, the principal case on which LePage's relies for support for its argument is SmithKline. _________________________________________________________________ 5. While LePage's does not label this argumentmonopoly leveraging and argued against the jury being instructed on the elements of a monopoly leveraging case (claiming that this is anold fashioned monopoly case), it is undeniable that the claim is similar to that advanced in the SmithKline, which has been labeled a monopoly leveraging case. See Advo, 51 F.3d at 1203; Fineman v. Armstrong World Indus., Inc., 980 F.2d 171, 204 (3d Cir. 1992). In a monopoly leveraging case, however, there are two markets--one in which the company enjoys a monopoly and another in which it tries to leverage the former monopoly power. ERNEST GELLHORN & WILLIAM E. KOVACIC, ANTITRUST LAW AND ECONOMICS 152 (4th ed. 1994). In this case and in SmithKline, there was only one market (the transparent tape market in this case and the cephalosporin market in SmithKline). Consequently, our prior characterization of SmithKline may be problematical. LePage's's reference to customers' inelastic need for Scotch tape, see Br. of Appellee at 28, and its contention that, as a practical matter, stores had no choice but to carry Scotch tape, see id. at 40, does suggest that there may be either two separate markets or one market and one submarket. We do not address this point, however, because the parties treat this case as having only one market for the purposes of this appeal. Even if this were considered a monopoly leveraging case, however, then Fineman would control, and LePage's would not have established the 15 In that case, Eli Lilly & Co. had two products, Keflin and Keflex, on which it faced no competition, and one product, Kefzol, on which it faced competition from SmithKline's product, Ancef. See SmithKline, 575 F.2d at 1061. Lilly offered a higher rebate of 3% to companies that purchased specified quantities of any three (which, practically speaking, meant combined purchases of Kefzol, Keflin and Keflex) of Lilly's cephalosporin products. See id. Although hospitals were free to purchase SmithKline's Ancef with their Keflin and Keflex orders with Lilly, thus avoiding the penalties of a tie-in sale,6 the practical effect of that _________________________________________________________________ requirements for 3M to be liable. See Fineman , 980 F.2d at 204. LePage's does not show that 3M had an actual or threatened monopoly in the leveraged market (private label tape). At the time of trial, LePage's still had 67% of the private label market, down from 88% previously. See Br. of Appellant at 8. Fineman involved a producer of a videotape magazine to be sold via distributors to retailers of floor covering products, which (with its principal) brought action against the floor covering manufacturer, alleging, inter alia, antitrust violations such as monopoly leveraging under the Sherman Act. See Fineman, 980 F.2d at 171. In Fineman, we declined to follow Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263, 275 (2d Cir. 1979), which involved a plaintiff that alleged that Kodak had leveraged its monopoly power in the camera and film markets to obtain a competitive advantage in the photofinishing equipment and services markets. In Berkey Photo the court held that the use of monopoly power attained in one market to gain a competitive advantage in another is a violation of section 2, even if there has not been an attempt to monopolize the second market. See id. at 276. Noting that only the Court of Appeals for the Sixth Circuit has adopted the Berkey Photo reasoning, in Fineman we agreed that in order to prevail upon a theory of monopoly leveraging, a plaintiff must prove threatened or actual monopoly in the leveraged market. See Fineman, 980 F.2d at 205. That circumstance does not apply here. 6. 3M also avoids the penalties of a tie-in sale, because its customers were free to purchase its Scotch tape by itself. To prove an illegal tiein, a plaintiff must establish that the agreement to sell one product was conditioned on the purchase of a different or tied product; the seller has sufficient economic power with respect to the tying product to appreciably restrain free competition in the market for the tied product and a `not insubstantial' amount of interstate commerce is affected. Northern Pac. Ry. Co. v. United States, 356 U.S. 1, 6, 78 S.Ct. 514, 518 (1958). 16 decision would be to deny the Ancef purchaser the 3% bonus rebate on all its cephalosporin products. Id. (internal footnote added). Because of Lilly's volume advantage, to offer a rebate of the same net dollar amount as Lilly's, SmithKline would have had to offer companies rebates ranging from 16% for average size hospitals to 35% for larger volume hospitals for their purchase of Ancef. See id. We concluded that Lilly willfully acquired and maintained monopoly power by linking products on which Lilly faced no competition (Keflin and Keflex) with a competitive product, resulting in the sale of all three products on a noncompetitive basis in what otherwise would have been a competitive market between Ancef and Kefzol. See id. at 1065. Moreover, this arrangement would force SmithKline to pay rebates on one product equal to rebates paid by Lilly based on sales volume of three products. See id. Expert testimony and the evidence on pricing showed that in the circumstances SmithKline's prospects for continuing in the Ancef market were poor. Here, LePage's argues that it does not have to show that 3M's package discounts could prevent an equally efficient firm from matching or beating 3M's package discounts. In its brief, LePage's argues that its expert economist explained that 3M's programs and cash payments have the same anticompetitive impact regardless of the cost structure of the rival suppliers or their efficiency relative to that of 3M. See Br. of Appellee at 43. LePage's alleges that the relative efficiency or cost structure of the competitor simply affects how long it would take 3M to foreclose the rival from obtaining the volume of business necessary to survive. See id. at 43. Competition is harmed just the same by the loss of the only existing competitive constraints on 3M in a market with high entry barriers. Id. The district court stated that LePage's introduced substantial evidence that the anticompetitive effects of 3M's rebate program caused its losses. See LePage's , 2000 WL 280350, at -8. We disagree with LePage's and the district court. In SmithKline, it was important that SmithKline showed that it could not compete by explaining how much it would have 17 had to lower prices for both small and big customers to do so. SmithKline ascertained the rebates that Lilly was giving to customers on all three products and calculated how much it would have had to lower the price of its product if the rebates were all attributed to the one competitive product. In contrast, LePage's did not even attempt to show that it could not compete by calculating the discount that it would have had to provide in order to match the discounts offered by 3M through its bundled rebates, and thus its brief does not point to evidence along such lines. It also did not show the amount by which it lowered its prices in actual monetary figures or by percentage to compete with 3M and how its profitability thus was decreased, and once again, its brief does not point to evidence along such lines. Rather, LePage's merely maintains, through the use of an expert, that it would have had to cut its prices drastically to compete and thus would have gone out of business. Although we are not evaluating the expert's method of calculating damages,7 and indeed, we do not reach the damages issue, we cannot overlook the lack of evidence to prove that pricing was what caused the drop in LePage's's market share. Simply pointing to an expert to support the contention that the company would have gone out of business, without providing even the most basic pricing information, is insufficient. Expert testimony is useful as a guide to interpreting market facts, but it is not a substitute _________________________________________________________________ 7. We note that LePage's has pointed out that case law supports its expert's use of the but-for model of calculating damages. See Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 117 n.11, 89 S. Ct. 1562, 1573 n.11 (1969); Rossi v. Standard Roofing, Inc., 156 F.3d 452, 484-87 (3d Cir. 1998). In Bonjorno v. Kaiser Aluminum & Chem. Corp., 752 F.2d 802, 812 (3d Cir. 1984), we stated that in constructing a hypothetical world free of defendants' exclusionary conduct, the plaintiffs are given some latitude in calculating damages, as long as their theory is not wholly speculative. There we ruled that the implications of the expert's testimony were not so inconsistent with the plaintiffs' theory of liability as to warrant a new trial. See id. at 812. We also stated that once a jury has found that the unlawful activity caused the antitrust injury, the damages may be determined without strict proof of what act caused which injury, as long as the damages are not based on speculation or guesswork. See id. at 813. 18 for them. Brooke Group, 509 U.S. at 242, 113 S.Ct. at 2598; see also Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 594 n.19, 106 S.Ct. 1348, 1360 n.19 (1986); Advo, 51 F.3d at 1198-99; Virgin Atlantic Airways Ltd. v. British Airways PLC, 69 F. Supp.2d 571, 579 (S.D.N.Y. 1999) ([A]n expert's opinion is not a substitute for a plaintiff 's obligation to provide evidence of facts that support the applicability of the expert's opinion to the case.), aff 'd, 257 F.3d 256 (2d Cir. 2001). Without such pricing information, it is difficult even to begin to estimate how much of the market share LePage's lost was due to 3M's bundled rebates. Furthermore, some experts have questioned the validity of attributing all the rebates to the one competitive product in situations such as these. 8 We do not need, however, to decide the validity of that method of _________________________________________________________________ 8. One court has mentioned a hypothetical situation where a low-cost shampoo maker could not match a competitor's package discount for shampoo and conditioner even though both products were priced above their respective costs. See Ortho Diagnostic Sys., Inc. v. Abbott Labs., Inc., 920 F. Supp. 455, 467 (S.D.N.Y. 1996). In that case, the court suggested that the bundled price could be unlawful under section 2 even though neither item in the package was priced below cost. If the entire package discount were attributed to the one product where the two parties compete, the low-cost shampoo maker could not lower its prices on the product enough to match the total discount without selling below its cost. See id. at 467-69. The Areeda treatise, however, suggests that this analysis is incorrect. See III PHILLIP E. AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW: AN ANALYSIS OF ANTITRUST PRINCIPLES AND THEIR APPLICATI ON P 749, at 467 n.6 (rev. ed. 1996). One aspect of this method of calculation worth noting is that the volume of the products ordered has a drastic effect on how much the competitor would have to lower its prices to compete. For example, suppose in a similar rebate program, a company was the only producer of products A and B but faced competition in C. If a customer orders 100 units each of A, B, and C at a price of $1.00 each, a 3% rebate would be $9.00 (3% of the total of $300.00). If the rebate on all three products were attributed to product C, then the competitor would have to lower its price to $0.91 in order to compete with it. The results would be starkly different, however, if a customer orders 100 units of A and B but only needs 10 units of C. Then the 3% rebate on the total purchase amount of $210.00 would be $6.30. If the rebate was attributed solely to product C, then a competitor would have to lower its price to $.37 on product C in order to match the company's price. 19 calculation, as LePage's does not even attempt to meet that less strict test by calculating how much it would have had to lower its prices to match the rebates, even if they all were aggregated and attributed to private label tape.9 LePage's also has not satisfied the stricter tests devised by other courts considering bundled rebates in situations such as that here. In a case brought by a manufacturer of products used in screening blood supply for viruses, Ortho Diagnostic Systems, Inc. v. Abbot Laboratories, Inc. , 920 F. Supp. 455 (S.D.N.Y. 1996), the district court held, inter alia, that the defendant's discount pricing of products in packages did not violate the Sherman Act. The defendant, Abbott Laboratories, manufactured all five of the commonly used tests to screen the blood supply for viruses. Ortho claimed that Abbott violated sections 1 and 2 of the Sherman Act by contracting with the Council of Community Blood Centers to give those members advantageous pricing if they purchased a package of four or five tests from Abbott, thereby using its monopoly position in some of the tests to foreclose or impair competition by Ortho in the sale of those tests available from both companies. See id. at 458. The district court stated that to prevail on a monopolization claim in a case in which a monopolist (1) faces competition on only part of a complementary group of products, (2) offers the products both as a package and individually, and (3) effectively forces its competitors to absorb the differential between the bundled and unbundled prices of the product in which the monopolist has market power, the plaintiff must allege and prove either that (a) the monopolist has priced below its average variable cost or (b) the plaintiff is at least as efficient a producer of the competitive product as the defendant, but that the defendant's pricing makes it unprofitable for the plaintiff to continue to produce. Id. at 469. Holding that the discount package pricing did not violate _________________________________________________________________ 9. The closest LePage's comes to supplying such information in its brief is its statement that LePage's made repeated efforts to save its tape business with Staples, reducing its prices to 1990 levels, and then reducing them again, to keep its plant open and people working. Br. of Appellee at 11. This is not close enough. 20 the Sherman Act, the Ortho court explained that any other rule would involve too substantial a risk that the antitrust laws would be used to protect an inefficient competitor against price competition that would benefit consumers. See id. at 470 (The antitrust laws were not intended, and may not be used, to require businesses to price their products at unreasonably high prices (which penalize the consumer) so that less efficient competitors can stay in business.) (internal quotation marks omitted). In this case, LePage's now does not contend that 3M priced its products below average variable cost, an allegation which, if made, in any event would be difficult to prove. See Advo, 51 F.3d at 1198-99.10 Moreover, LePage's's economist conceded that LePage's is not as efficient a tape producer as 3M. Furthermore, LePage's has not shown through an explanation of the prices it would have had to charge to match 3M's bundled rebates, that it would have been unprofitable for it to continue to produce. By its failure to show how much it would have to lower its prices before it would be driven out of business, LePage's effectively is arguing that it is the linkage of a monopoly product with a competitive one that is the significant factor to be considered rather than the pricing. Indeed, apparently this is also why LePage's insists that, while certain of 3M's actions were predatory, this is not a predatory pricing case. But if the mere act of offering a _________________________________________________________________ 10. 3M argues that Brooke Group provides that lowering the effective price of a product through price incentives cannot give rise to a section 2 Sherman Act claim unless the price is lower than an appropriate measure of cost. In fact, the Court's language in Brooke Group does raise a serious question as to whether or not it limits the holding of SmithKline to situations where prices are below average variable cost. However, Brooke Group was a predatory pricing or primary-line price discrimination case in which none of the tobacco companies had a monopoly of the market. See Brooke Group, 509 U.S. at 221-22, 113 S.Ct. at 2587. But inasmuch as LePage's does not even present a case that fulfills the requirements to establish liability of SmithKline, we need not decide the effect of Brooke Group on SmithKline. In the circumstances, we emphasize that we are not holding that if LePage's had supplied pricing information similar to that SmithKline presented our result would be different. 21 bundled rebate can be condemned under section 2 of the Sherman Act without regard for the relative efficiency or cost structure of the competitor, then competitors unwilling to accept lower profits could use the law to insulate themselves from competition. For example, a competitor who would have to lower its prices by 1% in order to match a bundled rebate could file suit against the alleged monopolist and obtain relief merely because it does not want to accept lower profits. It is difficult to see how consumers are better off if bundled rebates are illegal regardless of how competition is affected. After all, the Sherman Act directs itself not against conduct which is competitive, even severely so, but against conduct which unfairly tends to destroy competition itself. Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 458, 113 S.Ct. 884, 892 (1993); see also United States v. Microsoft Corp., 253 F.3d 34, 58 (D.C. Cir.), cert. denied, 122 S.Ct. 350 (2001). Furthermore, this is not a situation in which there is no business justification for 3M's actions. Inasmuch as it is difficult to distinguish legitimate competition from exclusionary conduct that harms competition, see Microsoft Corp., 253 F.2d at 58, some cases suggest that when a company acts against its economic interests and there is no valid business justification for its actions, then it is a good sign that its acts were intended to eliminate competition. For example, Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 608, 105 S.Ct. 2847, 2860 (1985), sets forth the lack of a valid business reason as a basis for finding liability. In that case, the Court affirmed a jury verdict for the plaintiff under section 2 of the Sherman Act where the defendant monopolist had stopped cooperating with the plaintiff to offer a multi-venue skiing package for Aspen skiers. The Court held that because the defendant had acted contrary to its economic interests, by losing business and customers, there was no other rationale for its conduct except that it wished to eliminate the plaintiff as a competitor. See id. at 608, 105 S.Ct. at 2860; see also Eastman Kodak, 504 U.S. at 483, 112 S.Ct. at 2090 (exclusionary conduct properly is condemned if valid business reasons do not justify conduct that tends to impair the opportunities of a monopolist's rivals or if a valid 22 asserted purpose would be served fully by less restrictive means).11 Similarly, in Concord Boat Corp. v. Brunswick Corp., 207 F.3d 1039, 1043, 1063 (8th Cir.), cert. denied, 531 U.S. 979, 121 S.Ct. 428 (2000), where boat builders brought an antitrust action against a stern drive engine manufacturer, the court held, inter alia, that the evidence was insufficient to find that the engine manufacturer's discount programs restrained trade and monopolized the market. Brunswick offered a higher percentage discount when boat builders bought a higher percentage of their engines from it, but there was no allegation that its pricing was below cost. See id. at 1044, 1062. In Concord Boat the district court cited the district court opinion in this case when 3M filed its motion to dismiss. See LePage's Inc. v. 3M, No. Civ. A. 973983, 1997 WL 734005 (E.D. Pa. Nov. 14, 1997). The Concord Boat district court agreed with the plaintiff that it was not the price (above cost or not) that was relevant but the strings attached to the price and that the district court here was correct to distinguish Brooke Group since there were no strings attached (bundled rebates) in that case. In Concord Boat, the strings attached were the _________________________________________________________________ 11. Microsoft also offers some guiding principles on monopolization under section 2. To be condemned as exclusionary, a monopolist's act must have an anticompetitive effect, which means that it must harm the competitive process and thereby harm consumers. Harm to a competitor will not suffice. Microsoft, 253 F.3d at 58. Competitive conduct is acceptable, but conduct that destroys competition is not. See id. As the burden of proof is on the plaintiff, it must demonstrate that the monopolist's conduct has the requisite anticompetitive effect. See id. at 57-58. If a plaintiff establishes a prima facie case under section 2, then the monopolist may offer a procompetitive justification for its conduct (a nonpretextual claim that its conduct is indeed a form of competition on the merits because it involves greater efficiency or enhanced consumer appeal), after which the burden would shift back to the plaintiff to rebut that claim. See id. at 59. And finally, if the monopolist's procompetitive justification is unrebutted, then the plaintiff must demonstrate that the anticompetitive harm outweighs the procompetitive benefits. See id. Microsoft also indicates that in considering the monopolist's conduct, the focus is on the effect of the conduct rather than on the intent behind it, as intent is only relevant in that it helps a court understand the likely effect of the conduct. Id. 23 exclusivity provisions. See Concord Boat Corp. v. Brunswick Corp., 21 F. Supp. 2d 923, 930 (E.D. Ark. 1998). The Court of Appeals for the Eighth Circuit, however, disagreed with the district court in Concord Boat. The court of appeal's opinion reflected an application of Brooke Group's strong stance favoring vigorous price competition and expressing skepticism of the ability of a court to separate anticompetitive from procompetitive actions when it comes to above-cost strategic pricing. See Concord Boat, 207 F.3d at 1061. More importantly, the court perceived that Brooke Group should be considered even with claims based on pricing with strings. See id. If a firm has discounted prices to a level that remains above the firm's average variable cost, the plaintiff must overcome a strong presumption of legality by showing other factors indicating that the price charged is anticompetitive. Id., citing Morgan v. Ponder, 892 F.2d 1355, 1360 (8th Cir. 1989) (internal quotation marks omitted). The court stated that a section 2 defendant's proffered business justification is the most important factor in determining whether its challenged conduct is not competition on the merits. See id. at 1062. The court, however, distinguished cases such as SmithKline and Ortho where products were bundled since they involved two markets. See id. Unlike the situation of the defendant in Aspen , 3M's pricing structure and bundled rebates were not necessarily contrary to its economic interests, as they likely increased its sales. Furthermore, other than the obvious reasons such as increasing bulk sales, market share and customer loyalty, there are several other potential procompetitive or valid business reasons for 3M's pricing structure and bundled rebates: efficiency in having single invoices, single shipments and uniform pricing programs for various products. See Br. of Appellant at 7. Moreover, the record demonstrates that, with the biggest customers, 3M's rebates were not eliminating the competitive process, as LePage's still was able to retain some customers through negotiation, and even though it lost other customers, the losses were attributable to their switching to foreign suppliers or changing suppliers because of quality or service without regard to the rebates. 24 In sum, we have concluded as a matter of law after an intensive analysis that 3M did not violate section 2 of the Sherman Act by reason of its bundled rebates. If we held otherwise, notwithstanding the effects of the challenged practices on 3M's competitors, we would risk curtailing price competition and a method of pricing beneficial to customers because the bundled rebates effectively lowered their costs.