Opinion ID: 2974155
Heading Depth: 3
Heading Rank: 1

Heading: Alleged Conduct

Text: Section 2 of the Sherman Act, 15 U.S.C. § 2, proscribes monopolization, attempted monopolization, and combinations and conspiracies to monopolize; NicSand alleges only monopolization and attempted monopolization. A claim [of monopolization] under § 2 of the Sherman Act requires proof of two elements: (1) the possession of monopoly power in a relevant market; and (2) the willful acquisition, maintenance, or use of that power by anti-competitive or exclusionary means as opposed to “growth or development resulting from a superior product, business acumen, or historic accident.” Conwood Co. v. U.S. Tobacco Co., 290 F.3d 768, 782 (6th Cir. 2002) (quoting Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 595-96 (1985)). “To establish the offense of monopolization a plaintiff must show that a defendant either unfairly attained or maintained monopoly power.” Potters Med. Ctr. v. City Hosp. Ass’n, 800 F.2d 568, 574 (6th Cir. 1986). “Monopoly power consists of ‘the power to control prices or exclude competition,’” Conwood, 290 F.3d at 782 (quoting Potters Med. Ctr., 800 F.2d at 574), but de minimis control over prices is insufficient to sustain a claim. Nearly every supplier of a distinctive (non-commodity) product has some power over prices, thus “monopoly power,” in the sense interesting to antitrust law, is “a term that properly connotes a degree of control over price and output that far exceeds the minimal market power possessed by most sellers of nonfungible goods and services.” Richard A. Posner, Antitrust Law 22, 195-96 (2d ed. 2001) (hereafter “Posner”). The elements of a claim for attempted monopolization are slightly different, because often the defendant only acquires the requisite monopoly power by way of the unlawful practice. “[I]t is No. 05-3431 NicSand, Inc. v. 3M Company Page 5 generally required that to demonstrate attempted monopolization a plaintiff must prove (1) that the defendant has engaged in predatory or anticompetitive conduct with (2) a specific intent to monopolize and (3) a dangerous probability of achieving monopoly power.” Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 456 (1993) (emphasis added). The “power component,” a “dangerous probability of achieving monopoly power,” is “normally measured through an analysis of market share.” Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 807a (2004 Supp.) (hereafter “Antitrust Law 2004”). And the “specific intent component,” which is more burdensome than the “general intent” a plaintiff must show in a “completed” monopolization claim, Conwood, 290 F.3d at 782, may nonetheless be discerned objectively. We presume that “‘no monopolist monopolizes unconscious of what he is doing’ . . . [and that] ‘[i]mproper exclusion (exclusion not the result of superior efficiency) is always deliberately intended.’” Id. (quoting Aspen Skiing, 472 U.S. at 60203) (alteration in original).3 The Sixth Circuit has thus said that “an attempted monopolization [under § 2] occurs when a competitor, [1] with a dangerous probability of success, [2] engages in anti-competitive practices [3] the specific design of which are, to build a monopoly or exclude or destroy competition.” Smith v. N. Mich. Hosps., Inc., 703 F.2d 942, 954 (6th Cir. 1983).
“In its simplest form, an exclusive dealing arrangement is a contract between a manufacturer and a buyer forbidding the buyer from purchasing the contracted good from any other seller, or requiring the buyer to take all of its needs in the contracted good from that manufacturer.”4 Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 1800a (2d ed. 2002) (hereafter “Antitrust Law 2002”). Because exclusive dealing contracts are contracts that restrain competition, antitrust claims against them are typically cast as violations of § 1 of the Sherman Act, 15 U.S.C. § 1 (proscribing contracts, combinations, and conspiracies in restraint of trade), or § 3 of the Clayton Act, 15 U.S.C. § 14 (forbidding exclusive dealing that substantially lessens competition). Nonetheless the logic of treating exclusive dealing claims under the Sherman Act’s § 2, which is concerned with monopolization, is clear: When an upstream dominant firm imposes exclusive dealing on distributors or dealers, the latter are disabled from selling any competitors’ version of the same product. . . . To the extent alternative dealers are unavailable or entry into dealing is difficult, such arrangements impair the opportunities of rivals or may raise their costs. Thus, although § 2 problems should not be presumed, they can emerge when it becomes clear that the exclusive dealing has the effect of strengthening or prolonging the dominant firm’s market position. Antitrust Law 2002 ¶ 760b7 (emphasis added); accord LePage’s, Inc. v. 3M, 324 F.3d 141, 157 (3d Cir. 2003) (“Even though exclusivity arrangements are often analyzed under § 1, such exclusionary conduct may also be an element in a § 2 claim.”). Exclusive dealing may enable a firm to move into a position of dominance that allows it to restrict market output and raise prices. See Posner 229 (“[W]here there are . . . large economies of scale in distribution, . . . [t]he effect [of exclusive dealing arrangements] is to increase the scale necessary for new entry, and [thus] increase the time required for entry and hence the opportunity for monopoly pricing.”). Monopolization through exclusive dealing is unlawful because it enables a party to attain that position of dominance not by offering “a superior product, business acumen, or historic accident,” Conwood, 290 F.3d at 782 (citation 3 But see United States v. Microsoft Corp., 253 F.3d 34, 59 (D.C. Cir. 2001) (“[I]n considering whether the monopolist’s conduct on balance harms competition and is therefore condemned as exclusionary for purposes of § 2, our focus is upon the effect of that conduct, not upon the intent behind it. Evidence of the intent behind the conduct of a monopolist is relevant only to the extent it helps us understand the likely effect of the monopolist’s conduct.”). 4 In this latter formulation, exclusive dealing contracts are referred to as “requirements contracts.” No. 05-3431 NicSand, Inc. v. 3M Company Page 6 omitted),5 but by raising its rivals’ distribution costs by eliminating their access to downstream markets. The complexity, however, is that a downstream distributor—a necessary party to the exclusive dealing arrangement—has no interest in helping one of its suppliers achieve a monopoly by erecting barriers to entry for lower cost rivals. A distributor’s profits increase with the volume of goods it distributes and the difference between the wholesale and retail price of each good. Thus the last thing a distributor wants is to be subject to a monopolistic supplier that can raise prices (a cost to the distributor) or restrict output. When a supplier seeks an exclusive contract from the distributor, we should expect the distributor to demand terms that compensate it for the possibility that the contract will enable the supplier to secure a monopoly. Once the [supplier] achieves a monopoly, the distributor will be at his mercy unless the terms of his contract with the [supplier] prevent the latter from later charging him a monopoly price or compensate him for the future exactions. But if the distributor obtains such terms, the [supplier] will gain nothing from having excluded his competitors. Posner 230. With one important caveat, distributors will not acquiesce to the establishment of an upstream6 monopoly, and the establishment of a monopoly cannot be the purpose of the exclusive dealing. The reason that a series of exclusive dealing contracts may be anticompetitive is that distributors, in agreeing to the terms of such contracts, may fall victim to a collective action problem. An individual distributor may agree to an exclusive dealing contract with one supplier but—on the assumption that other distributors will continue to patronize other suppliers and thus prevent the first supplier from forming a monopoly, or on the fear that it will be the only distributor that does not take advantage of the offered discount—not demand a discount that accurately reflects the possibility of future supracompetitive prices. See Posner 231. Distributors by their individual acts might thus enable the formation of an upstream monopoly (or, more precisely, an upstream 5 Exclusive dealing claims thus differ from exclusive distribution claims, which allege that a party has unlawfully committed to distribute its product through only one or more “authorized” distributors, often in a particular geographic area. See Care Heating & Cooling, Inc., 427 F.3d at 1008 (challenge by an “unauthorized” seller/servicer against an equipment manufacturer and one of its “authorized” sellers/servicers); CTUnify, Inc. v. Nortel Networks, Inc., 115 Fed. Appx. 831 (6th Cir. 2004) (challenge by phone training company against telecom equipment manufacturer and rival training company whose services manufacturer bundled with its products); see also Paddock Publ’ns. v. Chicago Tribune Co., 103 F.3d 42, 46-47 (7th Cir. 1996) (contrasting exclusive dealing and exclusive distribution). 6 It is on this basis that (in the Sherman Act § 1 context) exclusive dealing arrangements are not per se unlawful but are handled under the Rule of Reason—according to which courts examine whether a challenged practice has harmed competition. Antitrust Law 2002 ¶ 1820b. Indeed, in that inquiry, courts have articulated several reasons why exclusive dealing contracts might promote competition: In the case of the buyer, [exclusive dealing contracts] may assure supply, afford protection against rises in price, enable long-term planning on the basis of known costs, and obviate the expense and risk of storage in the quantity necessary for a commodity having a fluctuating demand. From the seller’s point of view, [exclusive dealing] contracts may make possible the substantial reduction of selling expenses, give protection against price fluctuations, and -- of particular advantage to a newcomer to the field to whom it is important to know what capital expenditures are justified -- offer the possibility of a predictable market. They may be useful, moreover, to a seller trying to establish a foothold against the counterattacks of entrenched competitors. Standard Oil Co. of Cal. v. United States, 337 U.S. 293, 306-07 (1949) (citations omitted); accord Menasha Corp. v. News Am. Mktg. In-Store, Inc., 354 F.3d 661, 663 (7th Cir. 2004) (“[C]ompetition for the contract is a vital form of rivalry, . . . which the antitrust laws encourage rather than suppress.”). No. 05-3431 NicSand, Inc. v. 3M Company Page 7 monopoly capable of enjoying monopoly profits), despite their having a collective incentive not to do so. Exclusive dealing liability protects downstream parties from this possibility. Whether a series of exclusive dealing contracts has allowed a supplier to unlawfully attain or maintain a monopoly can only be determined by reference to the particularities of the market and the terms of the exclusive contracts—including their durations and the magnitudes of the price discounts they provide.7 (In particular, facts about the market and the contracts might indicate whether a collective action problem existed among the downstream distributors so as to make the exclusive dealing contracts truly anticompetitive.) Such details, however, are not necessary and seldom available at the pleading stage. At the pleading stage, an exclusive dealing plaintiff’s obligations follow the general § 2 requirements: a plaintiff need only allege that the defendant (1) acquired or had a dangerous probability of acquiring monopoly power; (2) executed anticompetitive exclusive dealing contracts; and (3) possessed the specific intent to harm competition. Conwood, 290 F.3d at 782. Prerequisite to alleging monopoly power, the plaintiff must allege an economic market, but prior to discovery it need not “show[] market structure, power, and coverage of the exclusive dealing arrangement sufficient to create an inference of reduced and higher prices in the affected market.” Antitrust Law 2002, ¶ 1820a. 3. NicSand Has Sufficiently Alleged Unlawful Conduct We hold that NicSand has alleged conduct proscribed by § 2 of the Sherman Act. First, the Amended Complaint makes sufficient averments regarding monopoly power. Both the monopolization and attempted monopolization claims allege that 3M currently controls almost 100% of the market for DIY retail automotive abrasives and that the exclusive contracts directly allowed 3M to substantially increase its share. Second, the claims allege that 3M has acquired and attempted to acquire its monopoly power through anticompetitive conduct—specifically by providing substantial purchasing discounts to several large retailers in exchange for multi-year exclusive dealing arrangements. The Amended Complaint alleges that such discounts served no business purpose other than to exclude NicSand’s products from the market, and that the effect of such exclusion was to raise NicSand’s costs, to prevent it from competing effectively in the market, and eventually to bring about its bankruptcy. Third, the claims allege that 3M had the specific intent to monopolize the DIY retail automotive coated abrasives market when it undertook this course of conduct. The claims also allege that DIY retail automotive coated abrasives constituted an economic market for purposes of antitrust analysis. The district court erred in holding that NicSand failed to claim an antitrust violation on the grounds that “3M’s [alleged] behavior amounts to no more than surmounting the barriers to entry in order to compete in the sandpaper business.” (Memorandum, J.A. 165.) The court accepted 3M’s argument that the alleged conduct was precisely what NicSand (in the Amended Complaint) contended that the market required. As we have already said, however, nowhere in the Amended Complaint did NicSand claim that exclusive contracts were commonplace prior to 3M’s conduct. The Amended Complaint alleges only that annual line reviews created “de facto exclusive 7 The Areeda/Hovenkamp treatise articulates the prima facie case for exclusive dealing claims as follows: To succeed in its claim of unlawful exclusive dealing a plaintiff must [1] show the requisite agreement to deal exclusively and [2] make a sufficient showing of power to warrant the inference that the challenged agreement threatens reduced output and higher prices in a properly defined market. . . . [3] Then it must also show foreclosure coverage sufficient to warrant an inference of injury to competition . . . , depending on the existence of other factors that give significance to a given foreclosure percentage, such as contract duration, presence or absence of high entry barriers, or the existence of alternative sources of distribution or resale. Antitrust Law 2002 ¶ 1821; See also Microsoft, 253 F.3d at 58-59 (articulating the prima facie case liability under § 2). No. 05-3431 NicSand, Inc. v. 3M Company Page 8 agreement[s],” (J.A. 59), and that retailers carried a single brand of DIY retail automotive coated abrasives at a time but without any contractual obligation to do so. For all that is known at this stage in the litigation, 3M might have secured five- or ten-year deals with the retailers, for no business purpose other than to drive NicSand from the market. Such arrangements would be a far cry from NicSand’s account of previous market norms. 3M is also wrong to suggest that in order to withstand a motion to dismiss a plaintiff must make allegations regarding the terms or conditions of the exclusive contracts or the precise fraction of the wholesale market that such contracts foreclosed. NicSand needed only to make a short and plain statement of facts that, if true, would support a claim for relief. Fed. R. Civ. P. 8(a). NicSand claimed that the contracts directly made 3M the exclusive supplier to four of the six largest distributors and eventually gave 3M control of almost 100% of the wholesale market. NicSand also alleged that such contracts went beyond what the industry previously required and had the purpose and effect of harming competition. Similarly, NicSand need not have alleged that 3M engaged in predatory pricing or that its conduct has already caused wholesale prices to increase. Predatory pricing and exclusive dealing are distinct offenses under antitrust law, and there is no requirement that price increases be alleged in order to survive a motion to dismiss. In fact, the smaller the price discounts accompanying the exclusive dealing contracts, the more we might believe that a collective action problem exists among retailers, because then it is less8 likely that the terms of the contracts reflect the possibility of monopoly pricing in the future. And indeed a firm may act monopolistically even when prices remain stable—if such stability occurs in spite of falling costs. Finally, NicSand has alleged a product market with sufficient reference to substitute products to survive a motion to dismiss. 3M cites Queen City Pizza, Inc., v. Domino’s Pizza, Inc., 124 F.3d 430, 436 (3d Cir. 1997) for the rule that: Where the plaintiff fails to define its proposed relevant market with reference to the rule of reasonable interchangeability and cross-elasticity of demand, or alleges a proposed relevant market that clearly does not encompass all interchangeable substitute products even when all factual inferences are granted in plaintiff’s favor, the relevant market is legally insufficient and a motion to dismiss may be granted. Finding that NicSand “improperly excluded [from its alleged market] numerous substitutable and interchangeable abrasive and finishing products immediately 9available in the marketplace,” (Appellee’s Br. 38), 3M contends that dismissal was appropriate. We do not read Queen City Pizza to establish so heavy a burden at the pleading stage. The court acknowledged that “in most cases, proper market definition can be determined only after a factual inquiry into the commercial realities faced by consumers.” Id. And all that the opinion requires of plaintiffs is to propose (in their complaint) a market “with reference to the rule of reasonable interchangeability.” Id. (emphasis added). Because we find that NicSand’s Amended 8 It is notable that the magnitude of the discounts (measured as a percentage of NicSand’s sales) declined as 3M locked up a progressively larger share of the distribution market. That is, as 3M seemed more likely to attain a monopoly position, the downstream distributors demanded progressively smaller discounts—perhaps because they expected NicSand to exit the market and hoped to assure themselves of some discount (and not be the only one of the distributors not to have done so) before none was available. Discovery would shed light on whether this apparent decline in discounts did in fact indicate the presence of such a collective action problem. 9 Finding other grounds for dismissal, the district court did not address the sufficiency of NicSand’s market allegations. No. 05-3431 NicSand, Inc. v. 3M Company Page 9 Complaint does refer to the rule of interchangeability, we conclude that dismissal would have been inappropriate on that basis. Specifically, the Amended Complaint alleges that DIY retail automotive coated abrasives are not interchangeable with either wood abrasives (abrasives for wood surfaces) or professional automotive coated abrasives when one considers the quality, price, packaging, and distribution channels of each, as well as the raw materials that each requires. The Amended Complaint first alleges that automotive abrasives are distinguishable from wood abrasives in their use of waterproof glues and in their distribution channels. Wood abrasives have no need for waterproof glues because the sanding of wood surfaces (unlike the sanding of automotive surfaces) does not generate enough heat to melt the paint on the sanding surface. And automotive abrasives are typically sold at automotive parts stores, whereas wood abrasives are sold at home improvement centers. The Amended Complaint then alleges that DIY automotive abrasives are distinguishable from professional automotive abrasives because the latter employ higher quality raw materials and are thus up to 500% more expensive. And professional abrasives, unlike DIY abrasives, are packaged in bulk (up to 100 sheets per package, as opposed to three to ten sheets per package for retail abrasives) and are not cut to fit consumer sanding tools. Finally, the Amended Complaint points out that 3M’s website recognizes DIY retail automotive coated abrasives and professional abrasives as distinct products. 3M’s most compelling criticism of NicSand’s alleged market is that it fails to account for the possibility of supply substitution—the likelihood that new suppliers (for example, current suppliers of professional abrasives) will enter the market for DIY abrasives in the event that 3M, as a putative monopolist, attempts to raise prices or restrict output. Both supply substitution and demand substitution (consumers switching to other products in response to a price increase) factor into the ultimate definition of an economic market. See Blue Cross & Blue Shield United v. Marshfield Clinic, 65 F.3d 1406, 1410-11 (7th Cir. 1995). And if, for example, on a motion for summary judgment, NicSand does not put forth facts supporting its alleged market that account for the possibility of supply substitution, its claims will have to be dismissed. We decline, however, to uphold the dismissal of NicSand’s complaint at the pleading stage on this basis. Queen City Pizza requires only that a plaintiff plead a market “with reference to the rule of reasonable interchangeability,” 124 F.3d at 436, and the possibility of supply substitution may be best assessed after some measure of discovery. Notably, NicSand will bear much of the cost of discovery on the issue of supply substitution (which may include expert market analysis but little in the way of document requests from the defendant) as the litigation proceeds.