Summary
distinguishing between cases where the plaintiff's injury is inextricably intertwined with the defendant's anticompetitive conduct and cases where the injury to the plaintiff was incidental to defendant's conduct
Summary of this case from McCullough v. Zimmer, Inc.Opinion
Civil Action No. 03-773.
February 18, 2004
MEMORANDUM AND ORDER
This dispute arises out of the failure to renew a distributor agreement between the defendant, the Scotts Company ("Scotts"), and the plaintiff, U.S. Horticultural Supply, Inc. ("USH"). The defendant moves to dismiss the plaintiff's antitrust claim and to dismiss or, in the alternative, stay the promissory estoppel claims pending arbitration.
I. Background
USH is a Pennsylvania corporation engaged in the distribution and sale of horticultural products. Scotts is the leading supplier of do-it-yourself horticultural products in the world and among the leading suppliers of professional horticultural products in the United States. Scotts has a 52% share of the domestic market for professional and consumer horticultural products, and it has a 75% share of the domestic market for consumer water-soluble fertilizer. Am. Compl. ¶¶ 2, 4-5.
For the purposes of this motion to dismiss, the Court will accept all allegations in the plaintiff's amended complaint as true and all inferences will be drawn in the light most favorable to the plaintiff. See Port Auth. v. Arcadian Corp., 189 F.3d 305, 311 (3d Cir. 1999).
In 1996, USH and Scotts entered into a Horticultural Products Distribution Agreement ("distributor agreement"), giving USH the right to distribute Scotts' water-soluble fertilizers and other products in the mid-Atlantic regional market. The distributor agreement was set to expire on September 30, 2002. Id. ¶¶ 26.
In 1999, USH became a non-exclusive distributor for J.R. Peters' consumer water-soluble fertilizer. J.R. Peters was another horticultural product supplier and a competitor of Scotts. Id. ¶¶ 15, 18, 20.
During this time period, USH marketed its own brand of water-soluble fertilizer as Olympic Water Soluble Fertilizer ("Olympic"). USH was in the process of accepting subcontracting bids for the manufacture of Olympic from Scotts, J.R. Peters, and others. Id. ¶¶ 22-23.
In 2002, Scotts discussed renewing the distributor agreement with USH on the condition that USH no longer distribute J.R. Peters' water-soluble products and that USH not place the Olympic contract with J.R. Peters. USH did not agree to those terms, and Scotts ended discussions about renewing the distributor agreement. Scotts refused to renew in an attempt to intimidate USH and restrain or destroy J.R. Peters' ability to compete with Scotts. Id. ¶¶ 27-30.
The amended complaint makes four claims: (1) attempted monopolization under 15 U.S.C. § 2; (2) promissory estoppel concerning the distributor agreement; (3) promissory estoppel concerning certain product distribution in the United Arab Emirates; and (4) breach of contract.
Specifically, the plaintiff focuses on distribution of Banrot, a horticultural fungicide.
The plaintiff contends that the defendant breached the Grocote contract, which dealt with certain controlled release horticultural fertilizers.
The defendant filed the present motion to dismiss count I and to dismiss or, in the alternative, stay counts II and III pending arbitration. The Court dismissed counts II and III without prejudice in an Order filed on November 13, 2003, upon agreement of both parties. The Court, therefore, will discuss only the motion to dismiss as it relates to count I.
The defendant argues that count I should be dismissed for two reasons: (1) the plaintiff lacks standing to pursue an attempted monopolization claim; and (2) the plaintiff did not allege facts to satisfy its claim of attempted monopolization.
II. Analysis
A. Standing
The inquiry of standing is a threshold issue. See City of Pittsburgh v. West Penn Power Corp., 147 F.3d 256, 264 (3d Cir. 1998). Section Four of the Clayton Act confers standing on "any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws. . . ." 15 U.S.C. ¶ 15. The courts have narrowed the class of appropriate plaintiffs through the doctrine of "antitrust standing." See City of Pittsburgh, 147 F.3d at 264.
In the Third Circuit, the following multi-factor balancing test is used to evaluate antitrust standing:
(1) the causal connection between the antitrust violation and the harm to the plaintiff and the intent by the defendant to cause that harm, with neither factor alone conferring standing; (2) whether the plaintiff's alleged injury is of the type for which the antitrust laws were intended to provide redress; (3) the directness of the injury, which addresses the concerns that liberal application of standing principles might produce speculative claims; (4) the existence of more direct victims of the alleged antitrust violations; and (5) the potential for duplicative recovery or complex apportionment of damages.Id. (citations omitted).
1. Antitrust Injury Requirement
The standing inquiry should begin with the second factor, commonly known as the antitrust injury requirement. Id. at 264 n. 14. In determining whether the alleged injury is "of the type that the antitrust laws were intended to prevent," courts must look to "whether the injury flows from that which makes defendants' acts unlawful." Id. at 266.
The parties disagree whether the antitrust laws provide a remedy to the plaintiff, as a non-consumer and a noncompetitor. The plaintiff argues that standing extends to parties who are injured by the "very means" used to restrain competition. Blue Shield of Virginia v. McCready, 457 U.S. 465, 479 (1982); see also Carpet Group Int'l v. Oriental Rug Importers Ass'n, 227 F.3d 62, 77 (3d. Cir. 2000); Crimpers Promotions, Inc. v. Home Box Office, Inc., 724 F.2d 290, 294 (2d Cir. 1983). The defendant contends that the plaintiff, like the plaintiffs in terminated distributors cases, has not suffered an antitrust injury. See, e.g., Serpa Corp. v. McWane, Inc., 199 F.3d 6, 10 (1st Cir. 1999); Precision Surgical, Inc. v. Tyco, Int'l, Ltd., 111 F. Supp.2d 586, 588, 590 (E.D. Pa. 2000).
The Court is persuaded that McCready and its progeny control here. Because the relationships between the parties and the timing and type of the alleged antitrust violations are so important to this analysis, the Court will discuss the facts and holdings of McCready, Crimpers, and Carpet Group.
The Supreme Court in McCready started its analysis by recognizing the broad remedial purpose of § 4 of the Clayton Act. 457 U.S. at 472. The Court, however, noted that there are two general limits in finding standing. The first limitation prevents double recovery. Id. at 474. The second limitation looks to whether the injury suffered by the person is too remote from the antitrust violation. Id. at 477. The decision analogized remoteness to a proximate cause standard. The courts must look to the "physical and economic nexus between the alleged violation and the harm to the plaintiff" and "to the relationship of the injury alleged with those forms of injury about which Congress was likely to have been concerned in making defendant's conduct unlawful." Id. at 478.
The Court will discuss this limitation below, in terms of the duplicative recovery factor of the multi-factor test.
The plaintiff in McCready was a group health plan subscriber who was not reimbursed by the defendant because of its policy to reimburse for services provided by psychiatrists and not by psychologists. The Court held that there was no risk of double recovery, because the plaintiff paid her bill fully to the psychologist and her injury was distinct from any other harm.Id. at 475. The Court also found that her injury was not remote. The injury to the plaintiff was foreseeable, and the harm was a "necessary step" and, in fact, the "very means" that the defendant used to try to achieve a monopoly. Id. at 479.
The Court included a footnote with a demonstrative hypothetical situation, relevant to the case at hand The Court stated, "If a group of psychiatrists conspired to boycott a bank until the bank ceased making loans to psychologists, the bank would no doubt be able to recover the injuries suffered as a consequence of the psychiatrists' actions." Id. at 484 n. 21.
The Second Circuit has applied the McCready analysis, finding that a plaintiff had suffered an antitrust injury. Crimpers, 724 F.2d at 294. The plaintiff attempted to produce a trade show with the goal of forging direct links between the independent producers of cable television programming and cable television stations. The plaintiff alleged that the defendants, HBO and Showtime, boycotted the trade show and used their market power to pressure others not to appear, causing the show's failure and the plaintiff to go out of business. Id. at 291-92.
The court decided that there was no danger of double recovery because the plaintiff's loss was distinct from the harm to the producers of shows for being undersold or to the cable stations for overpaying. The court also held that the injury suffered was in no way remote. The court found that the plaintiff's injury was "the precisely intended consequence" of defendants' actions and was "inextricably intertwined" with the harm intended for the market. Id. at 294.
The Third Circuit was persuaded by and applied the analysis ofCrimpers. Carpet Group, 227 F.3d at 77. The plaintiff in that case had organized trade shows and acted as a broker to facilitate direct sales of oriental rugs from the foreign manufacturer to the domestic retailer, thereby bypassing the importer-exporter middle man and lowering rug prices. The defendants, who were importer-exporters, had used their market power to discourage rug manufacturers from dealing with the plaintiff. Id. at 64-65.
The court in Carpet Group stated that a plaintiff can suffer an antitrust injury even if the plaintiff is neither a competitor nor a consumer. It then held that the plaintiff could be considered a competitor of the defendant. Id. at 77. In finding that the plaintiff had suffered an antitrust injury, the court quoted Crimpers and stated that the injury was the "precisely intended consequence" of, and was "inextricably intertwined" with, the defendants' actions. Id. at 78.
With the McCready line of cases in mind, the Court is persuaded that the plaintiff in this case has alleged an antitrust injury. The plaintiff alleged that it was injured when the defendant did not renew the distributor agreement because the plaintiff refused to end its distribution of J.R. Peters' watersoluble fertilizer products. The plaintiff also alleged that the defendant's actions were intended to restrain J.R. Peters' ability to compete with the defendant. See Am. Compl. ¶ 27-30. The plaintiff was a principal distributor for J.R. Peters for water-soluble fertilizer products in the mid-Atlantic region.See id. ¶ 18.
Taking those allegations as true, the defendant would have needed the plaintiff to cease its distribution of J.R. Peters' products in order to restrain that company's ability to compete. The plaintiff's injury was not incidental to the harm intended for J.R. Peters; rather, it was the very means by which the defendant sought to restrain or destroy competition. The plaintiff's injury, therefore, was inextricably intertwined with the harm intended for J.R. Peters and the water-soluble fertilizer market.
The Court finds that the injury alleged by the plaintiff in this case fits comfortably in the analytical framework established by McCready. The Court acknowledges that the case here may not be as strong as the facts alleged in Crimpers orMcCready. See Crimpers, 724 F.2d at 295 (ranking the strength of standing in those cases). The McCready hypothetical, however, creates an approving example of the same relationship between a plaintiff's injury and an antitrust violation as is present in this case. See McCready, 457 U.S. at 484 n. 21.
The essence of the defendant's arguments against a finding of standing here is that there is no direct link between the plaintiff's injury and the alleged anticompetitive actions. The defendant specifically argues that: (1) the McCready line of cases is inapplicable; (2) the plaintiff is nothing more than a terminated distributor that lacks standing; (3) an allegation of retaliatory non-renewal is insufficient to show antitrust standing; and (4) the plaintiff's failure to allege injury to J.R. Peters destroys standing. The Court will examine each argument in turn.
The defendant disputes the applicability of the McCready line of cases on the grounds that the plaintiffs in those cases could be considered either competitors or consumers. It contends that the plaintiff in McCready was effectively a consumer, while theCrimpers and Carpet Group plaintiffs were effectively competitors.
The defendant's argument is unpersuasive for two reasons. First, the plaintiff characterizes itself as a competitor. More importantly, the Third Circuit in Carpet Group stated that there are situations when non-competitors and nonconsumers could have antitrust standing. 227 F.3d at 77. The McCready hypothetical, for instance, undercuts the defendant's contention that standing existed in that case because the plaintiff was a consumer. See McCready, 457 U.S. at 484 n. 21. The hypothetical bank is neither a consumer nor competitor to the psychiatrists, yet it would have standing if the psychiatrists boycotted the bank until it stopped making loans to psychologists. The holding of McCready, thus, does not rest solely on the plaintiff's role as a consumer.
The defendant next argues that the plaintiff lacks standing because the injury alleged is the same as in cases involving terminated distributors. Those cases held that the terminated distributor plaintiff lacked standing because the alleged injury was incidental to, and not the very means of, the antitrust violation. See, e.g., Serpa Corp. v. McWane, Inc., 199 F.3d 6, 12 (1st Cir. 1999); Precision Surgical, Inc. v. Tyco, Int'l, Ltd., 111 F. Supp.2d 586, 589 (E.D. Pa. 2000).
In Serpa, for example, the distributor plaintiff had an exclusive sales agreement with the manufacturer defendant. That defendant terminated the agreement after it and its competitor were acquired by another company. 199 F.3d at 8-9. Similarly, inPrecision Surgical, the distributor plaintiffs had an exclusive distribution contract with Origin Medsystems, Inc, which manufactured surgical products for hernia repair. The defendant terminated the distribution contract after acquiring Origin and its only competitor. 111 F. Supp.2d at 587.
The injuries suffered by the distributor plaintiffs in those two cases are incidental to the antitrust violations. The plaintiffs' losses were a mere consequence to the elimination of competition, rather than a necessary step. Because the Court has found that the injury alleged by the plaintiff in this case was inextricably intertwined with the anticompetitive harm, the terminated distributor cases cited by the defendant are inapplicable.
The defendant then contends that the plaintiff's allegations about retaliatory non-renewal of the distributor agreement do not support standing. See Gregory Mktg. Corp. v. Wakefern Food Corp., 787 F.2d 92 (3d Cir. 1986). The Third Circuit in Gregory held that a plaintiff lacked standing when a manufacturer defendant terminated its agreement after the plaintiff objected to, and refused to comply with, the defendant's anticompetitive actions.
The Gregory decision is distinguishable from the case at hand for two main reasons. First, the Third Circuit decided Gregory before Carpet Group clarified that there are certain situations in which non-consumers and non-competitors have standing. More importantly, the court explicitly held that the plaintiff's role was not essential to carry out the defendant's anticompetitive scheme. Id. at 96. Here, as discussed above, the injury to the plaintiff was a necessary step in the defendant's attempt to restrain J.R. Peters' ability to compete. Applying the terminology of Gregory, the plaintiff's role was essential to the defendant's scheme.
The defendant also argues that the plaintiff did not make any allegation of injury to J.R. Peters, and thus there can be no link to the injury allegedly suffered by the plaintiff. The plaintiff admits that it does not allege harm to J.R. Peters.See Tr. of July 31 Hr'g at 16. The plaintiff in McCready, however, did not allege that the competition between psychiatrists and psychologists was harmed. 457 U.S. at 490 n. 7 (Rehnquist, J., dissenting). As noted in Crimpers, if harm to the competitor, or to competition generally, was essential, the antitrust defendants would be in a better position if their scheme failed than if it succeeded. 724 F.2d at 295 n. 4. The injury to J.R. Peters is not the focus of the analysis for standing. The analysis instead focuses on the connection between the plaintiff's injury and the harm that the defendant sought to inflict on J.R. Peters and the water-soluble fertilizer market.
2. Other Standing Requirements
Antitrust injury and antitrust standing are "difficult to disentangle." City of Pittsburgh, 147 F.3d at 265 n. 15. Although antitrust injury often blends into the other requirements of standing, the Court finds that the plaintiff satisfied each of those requirements.
The causation of harm by intentional antitrust violations and the directness of the harm suffered are two closely related factors. These factors are satisfied when the complaint is read in a light most favorable to plaintiff. The plaintiff has pleaded it was directly injured and has argued that this injury was caused by the defendant's use of its market power in an intentional attempt to monopolize.
The next factor to examine is whether another more direct victim of the alleged antitrust violation exists. The defendant argues that J.R. Peters and consumers would be more direct victims than the plaintiff. The defense theory is that other parties would be better plaintiffs because consumers and competitors are the presumptively proper plaintiffs. Serpa, 199 F.3d at 10. Although those parties might be presumptively proper, the plaintiff is also proper. The Court has determined that the plaintiff's injury was direct and not remote, and, as there are no allegations regarding any injuries to others, the Court finds that this factor is satisfied.
Finally, the plaintiff's alleged injury is based on the distribution agreement and is "distinct and different" from the injury suffered by J.R. Peters for loss of its market share.Crimpers, 724 F.2d at 293-94; see also McCready, 457 U.S. at 475. There is no possibility of duplicative recovery. This factor also weighs in favor of the plaintiff's antitrust standing.
B. Allegations of Attempted Monopolization
A claim of attempted monopolization under 15 U.S.C. § 2 must allege these three elements: "(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). Courts may examine the third factor first, as a threshold matter.
See, e.g., Rutman Wine Co. v. E. J. Gallo Winery, 829 F.2d 729, 736 (9th Cir. 1987).
The Court finds that the plaintiff sufficiently alleged that the defendant had a dangerous probability of achieving monopoly power. In examining this element, the Court looks to "the relevant market and the defendant's ability to lessen or destroy competition in that market." Spectrum Sports, 506 U.S. at 456.
The relevant product market is identified in the complaint as the water-soluble fertilizer market. See Am. Compl. ¶ 8-9. The defendant argues that the plaintiff did not sufficiently address the reasonable interchangeability and cross-elasticities of demand for product substitutes. See Queen City Pizza, Inc. v. Domino's Pizza, Inc., 124 F.3d 430, 436 (3d Cir. 1997). The complaint did allege how the product is absorbed, how long the effect lasts, and which types of plants are compatible with the product. See Am. Compl. ¶¶ 8-9. Although the plaintiff did not make specific allegations naming product substitutes, it identified a product market when all inferences are drawn in the light most favorable to the plaintiff.
The defendant also argues that the plaintiff did not allege whether it refers to the consumer or professional water-soluble fertilizer market or both. The complaint, however, explicitly stated that the consumer and professional water-soluble fertilizer products form submarkets. Am. Compl. ¶ 47.
The plaintiff also identified the relevant geographic market. The complaint identified the United States as the market and the mid-Atlantic region, including North Carolina, Virginia, West Virginia, Pennsylvania, New Jersey, Maryland, Delaware, Connecticut, Washington, D.C., and areas of New York, as the relevant submarket. Am. Compl. ¶¶ 10, 47.
The defendant contends that the plaintiff confused the United States and mid-Atlantic when describing the geographic region. As with the product market, the plaintiff alleged a geographic market and a submarket.
The geographic market is "the area in which a potential buyer may rationally look for the goods or services he or she seeks."Tunis Bros. Co., Inc. v. Ford Motor Co., 952 F.2d 715, 726 (3d Cir. 1991) (citations omitted). In reviewing a jury verdict, the decision in Tunis Brothers explained that the legal standard in proving a geographic market is not satisfied by merely delineating a geographic area. Id. at 727. The plaintiff, however, identified a geographic area and also discussed competition in the water-soluble fertilizer market in that area.See Am. Compl. ¶¶ 18-20, 26. For the purposes of a motion to dismiss, the Court finds that the plaintiff sufficiently alleged a geographic market.
The defendant also argues that the plaintiff failed to allege facts to show that its injury would have been likely to lead to harm to J.R. Peters. The complaint alleged that there was a dangerous probability that the defendant would achieve a monopoly. Am. Compl. ¶ 49. It alleged that the defendant is dominant in the relevant product and geographic market and submarkets. Id. at ¶¶ 5, 12, 14. The plaintiff specifically stated that the defendant has more than a 75% market share in the domestic consumer water-soluble fertilizer market. Id. at ¶ 5. The complaint additionally alleged that the plaintiff was a principal distributor for J.R. Peters and that the defendant viewed J.R. Peters as a threat to its dominant position in the relevant market and submarkets. Id. at ¶¶ 18-19. These factors lead the Court to conclude that the plaintiff sufficiently alleged that its injury caused by the defendant would lead to harm to J.R. Peters and that the defendant has the ability to lessen or destroy competition.
The Court also looks to factors other than market share, such as "the strength of competition, probable development of the industry, the barriers to entry, the nature of the anticompetitive conduct, and the elasticity of consumer demand"Barr Labs., Inc. v. Abbott Labs., 978 F.2d 98, 112 (3d Cir. 1992). The plaintiff made allegations regarding the strength of competition, the barriers to entry, the nature of the conduct.See Am. Compl. ¶¶ 12, 19, 21, 30-31. The Court finds that the complaint sufficiently alleges that there is a dangerous probability that the defendant would achieve a monopoly.
As to the first element of an attempted monopolization claim, the Court finds that the plaintiff sufficiently alleged that the defendant engaged in anticompetitive conduct. The defendant argues that its offer to renew the distribution agreement contingent on the plaintiff's discontinuing to distribute J.R. Peters' products is nothing more than an offer for an exclusive distribution agreement. An exclusive agreement, while permissible in some cases, will be considered anticompetitive conduct when it is coupled with intent to harm competition. See Rutman Wine Co. v. E. J. Gallo Winery, 829 F.2d 729, 735 (9th Cir. 1987).
The Court finds that the complaint adequately pleaded the second element of attempted monopolization, a specific intent to monopolize. The plaintiff alleges enough facts, for the purpose of this motion, regarding the defendant's intention to injure the plaintiff, J.R. Peters, and competition. See Am. Compl. ¶¶ 20, 30, 48.
The defendant relies on the Ninth Circuit's decision inRutman to demonstrate that specific intent cannot be inferred simply from a decision to terminate a distributor. In Rutman, the court held that "[t]ermination of one distributor in order to establish an exclusive distributorship, even with the knowledge that harm to competition will ensue, does not create an inference that harm to competition is intended. . . ." 829 F.2d at 735-36.
This case is unlike Rutman in that the plaintiff's allegations encompass more than a terminated distributor agreement. The plaintiff has alleged that the agreement was terminated because the plaintiff continued to distribute J.R. Peters' products and entertained a bid from J.R. Peters to manufacture Olympic. These allegations are sufficient to allege specific intent to monopolize on the part of the defendant.
An appropriate Order follows.