Opinion ID: 3016862
Heading Depth: 2
Heading Rank: 4

Heading: anti-competitive effects

Text: Having demonstrated that Dentsply possessed market power, the Government must also establish the second element of a Section 2 claim, that the power was used “to foreclose competition.” United States v. Griffith, 334 U.S. 100, 107 (1948). Assessing anti-competitive effect is important in evaluating a challenge to a violation of Section 2. Under that Section of the Sherman Act, it is not necessary that all competition be removed from the market. The test is not total foreclosure, but whether the challenged practices bar a substantial number of rivals or severely restrict the market’s ambit. LePage’s, 324 F.3d at 159-60; Microsoft, 253 F.3d at 69. A leading treatise explains, A set of strategically planned exclusive dealing contracts may slow the rival’s expansion by requiring it to develop alternative outlets for its products or rely at least temporarily on inferior or more expensive outlets. Consumer injury results from the delay that the dominant firm imposes on the smaller rival’s growth. Herbert Hovenkamp, Antitrust Law ¶ 1802c, at 64 (2d ed. 2002). 20 By ensuring that the key dealers offer Dentsply teeth either as the only or dominant choice, Dealer Criterion 6 has a significant effect in preserving Dentsply's monopoly. It helps keep sales of competing teeth below the critical level necessary for any rival to pose a real threat to Dentsply's market share. As such, Dealer Criterion 6 is a solid pillar of harm to competition. See LePage's, 324 F.3d 141, 159 (3d Cir. 2001) (When a monopolist's actions are designed to prevent one or more new or potential competitors from gaining a foothold in the market by exclusionary, i.e. predatory, conduct, its success in that goal is not only injurious to the potential competitor but also to competition in general.).
Dentsply has always sold its teeth through dealers. Vita sells through Vident, its exclusive distributor and domestic affiliate, but has a mere 3% of the market. Ivoclar had some relationship with dealers in the past, but its direct relationship with laboratories yields only a 5% share. A number of factors are at work here. For a great number of dental laboratories, the dealer is the preferred source for artificial teeth. Although the District Court observed that “labs prefer to buy direct because of potential cost savings attributable to the elimination of the dealer middleman[,]” FF81, in fact, laboratories are driven by the realities of the marketplace to buy far more heavily from dealers than manufacturers. This may be largely attributed to the beneficial services, credit function, economies of scale and convenience that dealers provide to 21 laboratories, benefits which are otherwise unavailable to them when they buy direct. FF71, 81, 84. The record is replete with evidence of benefits provided by dealers. For example, they provide laboratories the benefit of “one stop-shopping” and extensive credit services. Because dealers typically carry the products of multiple manufacturers, a laboratory can order, with a single phone call to a dealer, products from multiple sources. Without dealers, in most instances laboratories would have to place individual calls to each manufacturer, expend the time, and pay multiple shipping charges to fill the same orders. The dealer-provided reduction in transaction costs and time represents a substantial benefit, one that the District Court minimized when it characterized “one stop shopping” as merely the ability to order from a single manufacturer all the materials necessary for crown, bridge and denture construction. FF84. Although a laboratory can call a manufacturer directly and purchase any product made by it, FF84, the laboratory is unable to procure from that source products made by its competitors. Thus, purchasing through dealers, which as a class traditionally carries the products of multiple vendors, surmounts this shortcoming, as well as offers other advantages. Buying through dealers also enables laboratories to take advantage of obtaining discounts. Because they engage in price competition to gain laboratories’ business, dealers often discount manufacturers’ suggested laboratory price for artificial teeth. FF69, 70. There is no finding on this record that manufacturers offer similar discounts. 22 Another service dealers perform is taking back tooth returns. Artificial teeth and denture returns are quite common in dentistry. Approximately 30% of all laboratory tooth purchases are returned for exchange or credit. FF97. The District Court disregarded this benefit on the ground that all manufacturers except Vita accept tooth returns. FF97. However, in equating dealer and manufacturer returns, the District Court overlooked the fact that using dealers, rather than manufacturers, enables laboratories to consolidate their returns. In a single shipment to a dealer, a laboratory can return the products of a number of manufacturers, and so economize on shipping, time, and transaction costs. Conversely, when returning products directly to manufacturers, a laboratory must ship each vendor’s product separately and must track each exchange individually. Consolidating returns yields savings of time, effort, and costs. Dealers also provide benefits to manufacturers, perhaps the most obvious of which is efficiency of scale. Using select high-volume dealers, as opposed to directly selling to hundreds if not thousands of laboratories, greatly reduces the manufacturer’s distribution costs and credit risks. Dentsply, for example, currently sells to twenty three dealers. If it were instead to sell directly to individual laboratories, Dentsply would incur significantly higher transaction costs, extension of credit burdens, and credit risks. Although a laboratory that buys directly from a manufacturer may be able to avoid the marginal costs associated 23 with “middleman” dealers, any savings must be weighed against the benefits, savings, and convenience offered by dealers. In addition, dealers provide manufacturers more marketplace exposure and sales representative coverage than manufacturers are able to generate on their own. Increased exposure and sales coverage traditionally lead to greater sales.
The benefits that dealers provide manufacturers help make dealers the preferred distribution channels – in effect, the “gateways” – to the artificial teeth market. Nonetheless, the District Court found that selling direct is a “viable” method of distributing artificial teeth. FF71, 73, 74-81, CL26. But we are convinced that it is “viable” only in the sense that it is “possible,” not that it is practical or feasible in the market as it exists and functions. The District Court’s conclusion of “viability” runs counter to the facts and is clearly erroneous. On the entire evidence, we are “left with the definite and firm conviction that a mistake has been committed.” United States v. Igbonwa, 120 F.3d 437, 440 (3d Cir. 1997) (citations and internal quotations omitted). It is true that Dentsply’s competitors can sell directly to the dental laboratories and an insignificant number do. The undeniable reality, however, is that dealers have a controlling degree of access to the laboratories. The long-entrenched Dentsply dealer network with its ties to the laboratories makes it impracticable for a manufacturer to rely on direct distribution 24 to the laboratories in any significant amount. See United States v. Visa U.S.A., 344 F.3d 229, 240 (2d Cir. 2003). That some manufacturers resort to direct sales and are even able to stay in business by selling directly is insufficient proof that direct selling is an effective means of competition. The proper inquiry is not whether direct sales enable a competitor to “survive” but rather whether direct selling “poses a real threat” to defendant’s monopoly. See Microsoft, 253 F.3d at 71. The minuscule 5% and 3% market shares eked out by direct-selling manufacturers Ivoclar and Vita, Dentsply’s “primary competitors,” FF26, 36, 239, reveal that direct selling poses little threat to Dentsply.
Although the parties to the sales transactions consider the exclusionary arrangements to be agreements, they are technically only a series of independent sales. Dentsply sells teeth to the dealers on an individual transaction basis and essentially the arrangement is “at-will.” Nevertheless, the economic elements involved – the large share of the market held by Dentsply and its conduct excluding competing manufacturers – realistically make the arrangements here as effective as those in written contracts. See Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752, 764 n.9 (1984). Given the circumstances present in this case, there is no ground to doubt the effectiveness of the exclusive dealing arrangement. In LePage’s, 324 F.3d at 162, we concluded that 3M’s aggressive rebate program damaged LePage’s ability to 25 compete and thereby harmed competition itself. LePage’s simply could not match the discounts that 3M provided. LePage’s, 324 F.3d at 161. Similarly, in this case, in spite of the legal ease with which the relationship can be terminated, the dealers have a strong economic incentive to continue carrying Dentsply’s teeth. Dealer Criterion 6 is not edentulous.2
An additional anti-competitive effect is seen in the exclusionary practice here that limits the choices of products open to dental laboratories, the ultimate users. A dealer locked into the Dentsply line is unable to heed a request for a different manufacturers’ product and, from the standpoint of convenience, that inability to some extent impairs the laboratory’s choice in the marketplace. 2 In some cases which we find distinguishable, courts have indicated that exclusive dealing contracts of short duration are not violations of the antitrust laws. See, e.g., CDC Techs., Inc. v. IDEXX Labs., Inc., 186 F.3d 74, 81 (2d Cir. 1999) (“distributors” only provided sales leads and sales increased after competitor imposed exclusive dealing arrangements); Omega Envtl., Inc. v. Gilbarco, Inc., 127 F.3d 1157, 1163 (9th Cir. 1997) (manufacturer with 55% market share sold both to consumers and distributors, market showed decreasing prices and fluctuating shares); Ryko Mfg. Co. v. Eden Servs., 823 F.2d 1215 (8th Cir. 1987) (manufacturer sold its products through both direct sales and distributors); Roland Mach. Co. v. Dresser Indus., Inc., 749 F.2d 380 (7th Cir. 1984) (contract between dealer and manufacturer did not contain exclusive dealing provision). 26 As an example, current and potential customers requested Atlanta Dental to carry Vita teeth. Although these customers could have ordered the Vita teeth from Vident in California, Atlanta Dental’s tooth department manager believed that they were interested in a local source. Atlanta Dental chose not to add the Vita line after being advised that doing so would cut off access to Dentsply teeth, which constituted over 90% of its tooth sales revenue. Similarly, DLDS added Universal and Vita teeth to meet customers’ requests, but dropped them after Dentsply threatened to stop supplying its product. Marcus Dental began selling another brand of teeth at one point because of customer demand in response to supply problems with Dentsply. After Dentsply threatened to enforce Dealer Criterion 6, Marcus dropped the other line.
Entrants into the marketplace must confront Dentsply’s power over the dealers. The District Court’s theory that any new or existing manufacturer may “steal” a Dentsply dealer by offering a superior product at a lower price, see Omega Environmental, Inc. v. Gilbarco, 127 F.3d 1157 (9 th Cir. 1997), simply has not proved to be realistic. To the contrary, purloining efforts have been thwarted by Dentsply’s longtime, vigorous and successful enforcement actions. The paltry penetration in the market by competitors over the years has been a refutation of theory by tangible and measurable results in the real world. 27 The levels of sales that competitors could project in wooing dealers were minuscule compared to Dentsply’s, whose long-standing relationships with these dealers included sales of other dental products. For example, Dentsply threatened Zahn with termination if it started selling Ivoclar teeth. At the time, Ivoclar’s projected $1.2 million in sales were 85% lower than Zahn’s $8 million in Dentsply’s sales. When approached by Leach & Dillon and Heraeus Kulzer, Zahn’s sales of Dentsply teeth had increased to $22-$23 million per year. In comparison, the president of Zahn expected that Leach & Dillon would add up to $200,000 (or less than 1% of its Dentsply’s sales) and Heraeus Kulzer would contribute “maybe hundreds of thousands.” Similarly, Vident’s $1 million in projected sales amounted to 5.5% of its $18 million in annual Dentsply’s sales. The dominant position of Dentsply dealers as a gateway to the laboratories was confirmed by potential entrants to the market. The president of Ivoclar testified that his company was unsuccessful in its approach to the two large national dealers and other regional dealers. He pointed out that it is more efficient to sell through dealers and, in addition, they offered an entre to future customers by promotions in the dental schools. Further evidence was provided by a Vident executive, who testified about failed attempts to distribute teeth through ten identified dealers. He attributed the lack of success to their fear of losing the right to sell Dentsply teeth. 28 Another witness, the president of Dillon Company, advised Davis, Schottlander & Davis, a tooth manufacturer, “to go through the dealer network because anything else is futile...[D]ealers control the tooth industry. If you don’t have distribution with the dealer network, you don’t have distribution.” Some idea of the comparative size of the dealer network was illustrated by the Dillon testimony: “Zahn does $2 billion, I do a million-seven. Patterson does over a billion dollars, I do a million-seven. I have ten employees, they have 6,000.” Dealer Criterion 6 created a strong economic incentive for dealers to reject competing lines in favor of Dentsply’s teeth. As in LePage’s, the rivals simply could not provide dealers with a comparable economic incentive to switch. Moreover, the record demonstrates that Dentsply added Darby as a dealer “to block Vita from a key competitive distribution point.” According to a Dentsply executive, the “key issue” was “Vita’s potential distribution system.” He explained that Vita was “having a tough time getting teeth out to customers. One of their key weaknesses is their distribution system.” Teeth are an important part of a denture, but they are but one component. The dealers are dependent on serving all of the laboratories’ needs and must carry as many components as practicable. The artificial teeth business cannot realistically be evaluated in isolation from the rest of the dental fabrication industry. A leading treatise provides a helpful analogy to this situation: 29 [S]uppose that mens’s bow ties cannot efficiently be sold in stores that deal exclusively in bow ties or even ties generally; rather, they must be sold in department stores where clerks can spread their efforts over numerous products and the ties can be sold in conjunction with shirts and suits. Suppose further that a dominant bow tie manufacturer should impose exclusive dealing on a town’s only three department stores. In this case the rival bow tie maker cannot easily enter. Setting up another department store is an unneeded and a very large investment in proportion to its own production, which we assume is only bow ties, but any store that offers less will be an inefficient and costly seller of bow ties. As a result, such exclusive dealing could either exclude the nondominant bow tie maker or else raise its costs in comparison to the costs of the dominant firm. While the department stores might prefer to sell the ties of multiple manufacturers, if faced with an “all-ornothing” choice they may accede to the dominant firm’s wish for exclusive dealing. Herbert Hovenkamp, Antitrust Law ¶ 1802e3, at 78-79 (2d ed. 2002).  The authors do not disclose whether the bow ties are blue polka-dot patterns or other designs. Criterion 6 imposes an “all-or-nothing” choice on the dealers. The fact that dealers have chosen not to drop Dentsply 30 teeth in favor of a rival’s brand demonstrates that they have acceded to heavy economic pressure. This case does not involve a dynamic, volatile market like that in Microsoft, 253 F.3d at 70, or a proven alternative distribution channel. The mere existence of other avenues of distribution is insufficient without an assessment of their overall significance to the market. The economic impact of an exclusive dealing arrangement is amplified in the stagnant, no growth context of the artificial tooth field. Dentsply’s authorized dealers are analogous to the high volume retailers at issue in LePage’s. Although the dealers are distributors and the stores in LePage’s, such as K-Mart and Staples, are retailers, this is a distinction in name without a substantive difference. LePage’s, 324 F.3d at 144. Selling to a few prominent retailers provided “substantially reduced distribution costs” and “cheap, high volume supply lines.” Id. at 160 n.14. The manufacturer sold to a few high volume businesses and benefitted from the widespread locations and strong customer goodwill that prominent retailers provided as opposed to selling directly to end-user consumers or to a multitude of smaller retailers. There are other ways across the “river” to consumers, but high volume retailers provided the most effective bridge. The same is true here. The dealers provide the same advantages to Dentsply, widespread locations and long-standing relationships with dental labs, that the high volume retailers provided to 3M. Even orders that are drop-shipped directly from Dentsply to a dental lab originate through the dealers. This 31 underscores that Dentsply’s dealers provide a critical link to end-users. Although the District Court attributed some of the lack of competition to Ivoclar’s and Vident’s bad business decisions, that weakness was not ascribed to other manufacturers. Logically, Dealer Criterion 6 cannot be both a cause of the competitors’ lower promotional expenditures which hurt their market positions, and at the same time, be unrelated to their exclusion from the marketplace. Moreover, in Microsoft, in spite of the competitors’ self-imposed problems, the Court of Appeals held that Microsoft possessed monopoly power because it benefitted from a significant barrier to entry. Microsoft, 253
Dentsply’s grip on its 23 authorized dealers effectively choked off the market for artificial teeth, leaving only a small sliver for competitors. The District Court erred when it minimized that situation and focused on a theoretical feasibility of success through direct access to the dental labs. While we may assume that Dentsply won its preeminent position by fair competition, that fact does not permit maintenance of its monopoly by unfair practices. We conclude that on this record, the Government established that Dentsply’s exclusionary policies and particularly Dealer Criterion 6 violated Section 2.