Third Circuit Finds Market-Share Discounts To Be Unlawful “De Facto Partial Exclusive Dealing” By Dominant Seller

By Sidley Austin LLP
Oct 10, 2012

Antitrust Update

The Third Circuit has handed down an important decision raising questions about the use of market-share discounts by dominant firms and about attempts by such firms to obtain preferred placements.

A common business practice is for sellers to provide “market-share discounts” that allow the customer to receive a discount or rebate depending on what percentage of its purchases in a particular category are made from the seller. Unlike volume discounts, which are tied to the quantity purchased, market share discounts depend on the proportion of the customer’s total purchases. Several courts have found that market-share discount programs on a single product line are procompetitive and do not violate the antitrust laws so long as the discounted prices are above cost.

The legality of market-share discounts by dominant firms was called into question by a split decision of the Third Circuit in ZF Meritor, LLC v. Eaton Corp., Nos. 11-3301 & 11-3426, 2012 WL 4483899 (3d Cir. Sept. 28, 2012). By a 2-1 vote, the court affirmed a jury verdict that the defendant’s market-share contracts were unlawful “de facto partial exclusive dealing.” Id. at *17. Traditionally, the concept of exclusive dealing has referred to contracts requiring the buyer to purchase all of its needs from the seller. The majority recognized “that ‘partial’ exclusive dealing is rarely a valid antitrust theory,” but found that 100% exclusivity is not always necessary to find a contract unlawful, noting that in this instance the defendant “entered into long-term contracts with every direct purchaser in the market, which locked up over 85% of the market for at least five years,” a step the majority termed “unprecedented” in the defendant’s industry. Id. at *18, *21. This decision also departed from the usual view that market-share discount contracts do not require the buyer to purchase any particular amount; they merely offer the buyer the opportunity to pay less if it purchases more. In the majority’s view, the seller’s market dominance meant that the jury was entitled to find the buyers were coerced into meeting the market share targets. The dissenting judge thought this argument “ridiculous,” stating that the defendant’s “offer of lower prices … in the form of rebates and direct payments in an effort to gain their business is hardly coercion.” Id. at *65-*66.

In addition, the majority rejected the defendant’s argument that its market-share discount contracts did not violate the antitrust laws because its prices were always above cost. In Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993), the Supreme Court held that a defendant’s pricing practices for a specific product cannot violate the antitrust laws if the prices are above cost. The Third Circuit held that this principle applies only when “price is the clearly predominant method of exclusion.” Id. at *11. In the majority’s view, these contracts had other exclusionary elements besides price, which could be challenged even if the prices were above cost.

The opinion also addressed the common practice of offering inducements for favorable product placement. This case involved transmissions for heavy-duty trucks, a market with only two sellers (plaintiff and defendant) and four buyers (the truck manufacturers). Trucks were made to order, and truck purchasers could select specific components, such as transmissions. Each manufacturer issued “data books” that listed various options, although customers could also order components not listed in the data books.

Under the defendant’s market-share discount contracts, each truck manufacturer agreed to list the defendant’s transmissions as the “standard” and “preferred” options in its data books, and each agreed that it would always list the defendant’s products at a lower price than that of any competing product. In addition, for a period of time, two of the truck manufacturers agreed that defendant’s products would be the only transmissions listed in the data books. Although the plaintiff had also asked (unsuccessfully) for an exclusive listing, the court held that the jury could find these contractual listing provisions to be exclusionary conduct by a monopolist.

If you have any questions regarding this update, please contact the Sidley lawyer with whom you usually work.

The Antitrust Practice of Sidley Austin LLP

Throughout the United States, Europe and China, Sidley’s clients consult our experienced global Antitrust team on a wide range of antitrust/competition law matters, including government investigations, merger clearances, litigation, antitrust counseling, compliance programs, and policy projects across many industries and business sectors.

To receive Sidley updates via email, please click here.

This Sidley update has been prepared by Sidley Austin LLP for informational purposes only and does not constitute legal advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this without seeking advice from professional advisers.

Attorney Advertising - For purposes of compliance with New York State Bar rules, our headquarters are Sidley Austin LLP, 787 Seventh Avenue, New York, NY 10019, 212.839.5300 and One South Dearborn, Chicago, IL 60603, 312.853.7000. Prior results do not guarantee a similar outcome.