Government competition authorities in the United States are sometimes challenged, if not criticized, for not pursuing claims based on single firm conduct in maintaining a monopoly. The recent opinion of the United States Court of Appeals for the Eleventh Circuit in McWane, Inc. v. Federal Trade Commission, No. 14-11363 (April 15, 2015) is an effective answer to those critics, demonstrating that the authorities will pursue cases based on single firm conduct under Section 2 of the Sherman Act in appropriate circumstances, especially when large market shares are involved.
Brief Background. The FTC challenged McWane’s use of an exclusivity mandate with its distributors as violating the antitrust laws, relying on Section 2 monopolization and attempted monopolization law and precedent. Following a two month administrative trial, McWane was found to have engaged in monopolization. McWane appealed the decision to the Commission, which affirmed the ALJ’s decision on the monopolization claim, setting the stage for the appeal to the Eleventh Circuit. At issue in McWane was the company’s exclusive dealing policy with its distributors in the domestic fittings market. McWane manufactured and sold pipe fittings — the molded pieces that couple the pipes together — which was largely sold to municipalities for water authorities. By applicable US regulation, certain projects required that the parts be manufactured only in the United States. The FTC alleged that this was a separate market — a so-called domestic fittings market – in which McWane had 100% (later declining to 90%) of the share in the United States. McWane, on the other hand, argued that the market was broader, encompassing all fittings, domestic and international. The Eleventh Circuit rejected McWane’s market definition and, finding substantial evidence that the anticompetitive effects outweighed the largely non-existent procompetitive effects, affirmed the claim of monopolization in this market.
McWane is significant for several reasons. First, McWane provides useful insight into when an exclusivity provision — which the court notes is not per se illegal — constitutes willful maintenance of monopoly power and thus, a violation of the antitrust laws. Second, the McWane opinion notes that a violation of the antitrust laws can occur even when significant entry (5% in one year by its competitor, Star Pipe Products) has occurred by a competitor. Third, the opinion demonstrates that no matter how compelling the legal defense, if the historical emails and documents tell a different, anticompetitive story, then the defense will not be credible. And finally, the opinion highlights that when all is said and done, the best evidence of anticompetitive conduct in the marketplace may well be the pricing of the subject company itself.
The Monopolization Claim Was Most Certainly Lost at the Market Definition Stage. While McWane may still have lost had the market not been defined to include only the domestic fittings market, once it was so defined, the game was over. At that point, McWane was the 100% monopolist whose every move was scrutinized under this hue. Had the market been defined as all fittings, McWane might have had a marginally better chance of convincing that competition existed, although even under that market, McWane was one of three manufacturers of fittings for sale in the United States. An exclusivity provision in the latter context could be defensible, but in the former, hardly.
When is Significant Entry Still Meaningless? McWane is also notable in that a competitor actually obtained very significant market penetration during the time that the exclusive provision was used. Ordinarily, this would provide excellent evidence that the policy at issue was not anti-competitive, as it did not prevent significant and timely entry into a market. Yet, here, McWane made this very argument — before the ALJ, the Commission and the Eleventh Circuit — but in each case, the argument was rejected. The facts were not as simple as McWane would have one believe. Indeed, other evidence was presented of large barriers to entry. Based on McWane’s exclusivity program, the two largest distributors prohibited their branches from buying from anyone other than McWane while the program was active. With the key dealers tied up, McWane’s conduct resulted in “substantial and problematic foreclosure” of the market to competition. And even with respect to Star’s entry, the Eleventh Circuit noted that the relevant question for the competition analysis was not whether entry occurred — it did — but whether greater entry would have occurred absent the conduct. The Eleventh Circuit found substantial evidence to back up that finding of competitive harm.
Those Pesky Emails. A reading of McWane also highlights a point that has been made with more frequency by the courts and competition agencies today: regardless of how great your defense and argument may seem, if the internal company documents and email do not support the position, or worst yet, contradict it, then it will be of no value. As noted by the Eleventh Circuit: “[T]here is agreement on the proposition that ‘no monopolist monopolizes unconscious of what he is doing.’” Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 605 (1985) (quoting United States v. Aluminum Co. of Am., 148 F.2d 416, 432 (2d Cir. 1945))). In this case, the Court found the evidence of anticompetitive intent “particularly powerful.” McWane’s internal emails discussed Star’s anticipated downward impact on the domestic fittings’ prices and the need to keep Star from being able to “reach any critical mass.” Not only did the documents reflect an anticompetitive intent, but they undermined any credible argument regarding procompetitive benefits of the conduct. Indeed, the Eleventh Circuit found the documents ”damning,” and demonstrating that the procompetitive justifications were “merely pretextual.” The conclusion is inescapable: what a company says about the conduct prior to litigation can be some of the best or worst evidence regarding the pro or anti-competitive intentions at issue and it must be understood that such evidence will be considered.
In Any Event, It’s the Pricing that Matters. Although this does not appear to have been a close call for the Eleventh Circuit, had it been, the final straw would likely have been McWane’s pricing in the domestic fittings market itself. In a pointed discussion, the Court specifically noted that while McWane imposed this exclusivity in the domestic fittings market, it raised its prices and increased its gross profits “despite its flat production costs and its own internal projections that Star’s unencumbered entry into the market would cause prices to fall.” The Court found these prices supracompetitive and noted that they were perhaps the Commission’s “most powerful evidence of anticompetitive harm.” The numbers matter.
It’s the Practical Effect. Finally, McWane made an argument that its exclusivity program was presumptively legal, as it was short-lived and non-binding. This argument, while perhaps true, did not fully account for the ”practical effect” of the conduct and ultimately proved too little. Looking at such effect, the Court found that the program was arguably more anticompetitive than a traditional exclusivity arrangement as there were no procompetitive benefits associated with it.
Exclusive contracts can be useful tools for companies to protect their brands, manage their resources and drive interbrand competition. But, as demonstrated in McWane, exclusive contracts, whether intentionally or not, can be used for anticompetitive purposes or effect to limit or restrict a competitor’s entry by, among other things, limiting options for distribution. Whether the conduct falls into the procompetitive or anticompetitive side will depend on many factors, but perhaps the most important for consideration is the market itself. When market shares are high, conduct that might otherwise pass muster in a less concentrated market may find greater scrutiny and perhaps even condemnation under the antitrust laws.