No. C96-334 MJM
May 8, 2000.
OPINION AND ORDER
Before the Court is Sylvan's consolidated motion in limine. (Doc. # 148 and 149). The central issue of Sylvan's motion is its request that the Court preclude evidence regarding ACT's lost profits as a result of losing the contract with National Association of Securities Dealers, Inc. ("NASD").
ACT has also filed a motion in limine to exclude the testimony of Sylvan's expert, William T. Keevan (Doc. # 150). Because Sylvan stated at oral argument that it was unsure whether it would indeed call Mr. Keevan, the Court will reserve ruling on ACT's motion until such time as Sylvan decides to call Mr. Keevan.
This case originated out of ACT's frustrated attempt to acquire NASD's computer-based testing ("CBT") network in an effort to launch its own nationwide network of CBT. When NASD accepted a bid from Sylvan for its CBT network, ACT brought the present action alleging, among other things, that Sylvan tortiously interfered with ACT's prospective business relationship with NASD and that those actions, in combination with others, violated § 2 of the Sherman Antitrust Act, 15 U.S.C. § 2 (1998).
When the Court ruled on Sylvan's motion for summary judgment on ACT's claim of tortious interference with a business contract, this Court found that the overriding reason for Sylvan's pursuit of the NASD CBT network was not to financially injure ACT. Put another way, this Court found that ACT failed to generate an issue of disputed fact regarding the validity of Sylvan's proffered business reasons for bidding on NASD's business and dismissed the claim.
In Sylvan's motion in limine presently before the Court, Sylvan contends the Court's earlier ruling essentially precludes the recovery of any damages emanating from ACT's failed attempt to contract with NASD for its CBT network. In other words, Sylvan argues, because this Court already found Sylvan had legitimate business reasons for contracting with NASD, the Court cannot now hold Sylvan's pursuit of the NASD contract was in violation of § 2 of the Sherman Antitrust Act, and thus allow ACT to recover lost profits from the loss of that contract. For the reasons that follow, this Court agrees.
The Court has recounted the factual background of this case at length in earlier orders. As such, the Court will rely on its earlier recitation of the facts and address only those facts relevant to the present analysis when necessary.
A claim pursuant to § 2 of the Sherman Antitrust Act requires proof that the defendant intended his acts to produce monopoly power. See Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 602 (1985) (finding intent to monopolize is relevant in both an attempt to monopolize and a monopolization claim). This required intent "does not merely mean intent to prevail over one's rivals; it goes beyond that to include intent to control prices or to restrain competition unreasonably." General Industries Corp. v. Hartz Mountain Corp., 810 F.2d 795, 801 (8th Cir. 1987). "In the context of an attempted monopoly claim, specific intent refers not to the defendant's general intent to do a particular act, but to an overall anticompetitive intent expressed through its actions to destroy competition or build monopoly." Id. at 802. "Specific intent need not be proven by direct evidence, but can be inferred from the defendant's anticompetitive practices or other proof of unlawful conduct." Id. "`An anticompetitive practice may have economic justification, but its use may be undertaken with unlawful intent and in the desire to achieve an unlawful goal.'" Id., (quoting United States v. Dairymen, Inc., 660 F.2d 192,195 (6th Cir. 1981), cert denied, 474 U.S. 822 (1985)).
In its December Summary Judgment Order, the Court found that ACT put forth sufficient direct and indirect evidence of Sylvan's intent to achieve monopoly power. The Court wrote:
The elements of a § 2 violation, possession of monopoly power in the relevant market, and the willful acquisition or maintenance thereof, are easily resolved in this motion for summary judgment. While Sylvan claims that legitimate business reasons exist to explain all of its allegedly anticompetitive actions, Sylvan's market share, coupled with its use of long-term or exclusive contracts, its acquisitions of competitors or potential competitors, and its dealings with NASD demonstrate that there exists a question of fact whether Sylvan had the power to control prices or exclude competition and willfully acquired or maintained that power. Moreover, the record demonstrates that there exists a genuine issue of material fact whether Sylvan engaged in anticompetitive conduct with the specific intent to monopolize and whether there was a dangerous probability of Sylvan achieving monopoly power. (Footnote omitted).
(Doc. #137 at 37).
ACT is correct in its contention that the Court is permitted to look to Sylvan's conduct as a whole in its determination of whether Sylvan's actions were anticompetitive. See United States v. Grinnell Corp., 384 U.S. 563, 576 (1966). The quoted passage evinces the Court's willingness to look to Sylvan's actions in their totality to ascertain if questions of fact remain regarding the existence of an antitrust violation. Likewise, ACT accurately contends the Court should take into consideration the effect the alleged anticompetitive conduct had on consumers as well as the plaintiff. See Aspen Skiing Co., 472 U.S. at 604-605. This analysis, however, does not relieve ACT of its burden of proving its injuries flowed from the complained of anticompetitive conduct. See Concord Boat Corp. v. Brunswick Corp., — F.3d ___, 2000 WL 303035 (8th Cir. March 24, 2000) (stating that "[i]n order to prevail plaintiffs must prove for each claim an antitrust violation, the fact of damage or injury, a causal relationship between the violation and the injury, and the amount of damages") (internal quotations omitted); National Association of Review Appraisers, 64 F.3d 1130, 1135 (8th Cir. 1995), cert denied, 517 U.S. 1189 (1996) (holding plaintiff "may not recover for losses due to factors other than the [defendant's] anticompetitive violations."); Amerinet, Inc. v. Xerox Corp., 972 F.2d 1483, 1491 (8th Cir. 1992), cert denied, 506 U.S. 1080 (1993) (finding plaintiff must prove fact or causation of antitrust injury); c.f. St. Louis Convention Visitors Commission v. National Football League, 154 F.3d 851, 864 (8th Cir. 1998) (finding in a § 1 case, plaintiff must prove injury derived from the defendant's anticompetitive violation"). The Amerinet court speaks directly to this issue: "If a plaintiff has suffered financial loss from the lawful activities of a competitor, then no damages may be recovered under the antitrust laws. It is a requirement that an antitrust plaintiff must prove that his damages were caused by the unlawful acts of the defendant. . . . This is the essence of `antitrust injury' as set forth by the Supreme Court . . ." (citations omitted) Thus, while Sylvan's conduct as whole may have been anticompetitive, in order for ACT to recover lost profits from the NASD contract it lost to Sylvan, it must prove that Sylvan's pursuit of the NASD contract was anticompetitive conduct.
ACT correctly points out that the Court explicitly considered Sylvan's acquisition of the NASD business as part of a pattern of anticompetitive conduct. However, ACT fails to address extensive legal precedent which stands for the proposition that evidence of the intent to monopolize can be refuted by a valid business reason for said conduct; that is to say, where valid business reasons exist for particular conduct, that conduct can not be considered an antitrust violation. See Eastman Kodak Co. v. Image Technical Services, 504 U.S. 451, 483, n. 32 (1992) (suggesting that monopolist may rebut an inference of exclusionary conduct by establishing "legitimate competitive reasons for the refusal"); Aspen Skiing Co., 472 U.S. at 604-605; Concord Boat Corp., — F.3d ___, 2000 WL 303035 (holding "A Section 2 defendant's proffered business justification is the most important factor in determining whether its challenged conduct is not competition on the merits); Midwest Radio Co. v. Forum Publishing Co., 942 F.2d 1294, 1298-99 (8th Cir. 1991) (finding valid business reason for alleged anticompetitive conduct can not support inference of § 2 violation); Bell v. Dow Chemical Co., 847 F.2d 1179, 1185 (5th Cir. 1988) (finding valid business justifications for refusal to deal allow for a judgment as a matter of law that defendant did not have requisite intent to perpetuate a monopoly); General Industries Corp., 801 F.2d at 804 (finding anticompetitive conduct is conduct without legitimate business purpose that makes sense only because it eliminates competition); Trace X Chemical, Inc. v. Canadian Industries, 738 F.2d 261, 268 (8th Cir. 1984), cert denied, 469 U.S. 1160 (1985) (holding proof of statements supporting inference of antitrust violation cannot transform manufacturer's otherwise legitimate business activities into anticompetitive conduct).
The only alternative to accepting valid business reasons as a complete defense to an antitrust claim would be to require courts to balance the social gains of such conduct against the competitive harms, which courts have consistently refrained from doing. See III Areeda Hovenkamp , Antitrust Law, § 658, 127 (1996). According to Areeda Hovenkamp, there are three principles behind the courts' refusal to engage in such a balancing test: "(1) Courts are not capable of quantifying such gains and losses in any event, except in the grossest possible sense; (2) the monopolist no more than any other firm operates under a duty to maximize social welfare; and (3) the purpose of the business justification inquiry is not to measure the degree of net competitive harm, but rather to aid the decision-maker in characterizing the nature of the defendant's conduct." Id.
Thus, once a proffered business reason is deemed valid, accepted in good faith and not as pretense for unlawful motives, that conduct cannot be held unlawful. See c.f. Midwest Radio, 942 F.2d at 1298-99. In its December Order, the Court ruled as a matter of law that the reasons proffered by Sylvan for entering into the NASD contract were indeed legitimate. For that reason, Sylvan's contract with NASD cannot give rise to a violation of § 2 of the Sherman Antitrust Act and cannot support an award of damages to ACT.
Because the Court recognizes the import of this holding — namely, ACT would not be entitled to damages derived from the loss of the NASD contract — the Court finds it prudent to revisit those reasons promulgated by Sylvan to ensure no genuine issue of fact remains and ACT is not entitled to lost profits as a matter of law.
What constitutes a valid business reason for purposes of antitrust analysis is a fact specific inquiry, with no bright-line criterion. Some general principles that courts look to, however, include whether the conduct maximizes a firm's profits. See III Areeda Hovenkamp , Antitrust § 658 at 123 (1996). However, conduct cannot be deemed lawful on that basis alone because, quite obviously, anticompetitive conduct can be profit making as well. Id. An additional inquiry is often whether the conduct promotes efficiency for the defendant. See Data General Corp. v. Grumman Sys. Support Corp., 36 F.3d 1147, 1183 (1st Cir. 1994) (finding pursuit of efficiency might be a legitimate business reason). With these guidelines in mind, the Court revisits Sylvan's proffered business reasons.
In Sylvan's statement of undisputed facts accompanying its motion for summary judgment, it listed four reasons for its interest in submitting a proposal for NASD's business. (Doc. #103). They are:
1. Sylvan's network was operating well below half its capacity, and the NASD testing volume represented a means of filling some of the network's excess capacity.
2. NASD was a prestigious organization, and Sylvan believed that having NASD as a client would enhance the credibility and stature of Sylvan's network.
3. In regard to the aspect of Sylvan's proposal relating to the acquisition of NASD's testing centers, Sylvan was advised that NASD was interested in getting those assets of its books, and Sylvan understood that a proposal designed to satisfy NASD in that regard would have the best possibility of succeeding.
4. Even though certain of NASD centers would be duplicative, many of the NASD centers were located in high volume urban centers, where Sylvan anticipated that it could use additional coverage.
As to the first reason, Sylvan's operation below capacity, ACT points to a letter from Douglas Becker, Co-CEO of Sylvan, which states that NASD was an important client "not because of its current volume, but due to other opportunities in financial services overseas." (Plaintiff's Ex. No. 120 at N005224; Becker Dep. at 209-10) The letter also states that the low price offered to NASD was possible because of Sylvan's "high and growing testing volume." Id. ACT avers that Sylvan's stated motives are inconsistent and evidence of pretext. However, the probative value of Becker's letter is minimal given it was written a year and half prior to Sylvan's proposal. Moreover, Sylvan explains that the phrase referencing the growing volume was taken out of context. Sylvan explains, the growing testing volume statement was referring to Sylvan's possible growth were it to acquire NASD's business. It is undisputed that Sylvan was in fact operating under capacity and needed more testing volume. Even ACT recognized that a CBT network is not worth establishing unless the "network has a significant, committed volume of test-takers." Complaint, ¶ 45. Sylvan's centers were operating at below half their capacity. It was in the interest of efficiency that Sylvan acquire NASD's substantial testing volume.
There is substantial, unrebuked evidence that Sylvan was operating below capacity and was looking for additional testing volume. The under capacity was caused, in part, by ETS' slowness in converting paper and pen tests to electronic formats. The initial contact by Sylvan and NASD in November, 1995, was simply an inquiry as to whether Sylvan could solicit NASD's overflow testing.
ACT questions Sylvan's alleged motive to remedy its excess capacity through the acquisition of more testing centers which would result in additional capacity. This response is answered by Sylvan's third proffered business reason — NASD was interested in getting rid of its testing centers and in order for Sylvan to secure a bid for NASD's business, the proposal needed to include a bid for the centers. ACT states quite plainly that Sylvan could have bid on NASD's volume alone. ACT's argues that Sylvan's proposal for the centers was a move to keep ACT from gaining the centers and becoming a competitor. While this may have been an "additional benefit" of the acquisition, it is not disputed that Sylvan also had a legitimate business reason to acquire those centers. Indeed, what the facts do reveal is that Sylvan wanted NASD's testing volume. It became apparent to Sylvan that the only way to ensure success on its bid was to include a bid for the centers, so Sylvan did.
Sylvan further justifies its acquisition of NASD's testing centers with its fourth reason — the anticipated need for more centers in urban areas. Sylvan agrees that acquiring NASD's centers would lead to some duplication; that is, the addition of centers in areas where Sylvan already had centers. But Sylvan contends that its centers in major urban areas where most NASD brokers are located, would likely run over capacity after the acquisition of NASD's testing volume, creating a need for multiple centers in some places. ACT points to testimony from Sylvan Co-CEO, R. Christopher Hoehn-Saric, and the President of NASD, Joseph Hardiman to support the proposition that Sylvan did not need additional test centers in areas where it already had centers. ACT further asserts that Sylvan's intention all along was to close most, if not all of NASD's centers. Sylvan does not dispute its intention to close many of NASD's test centers. Indeed, Hardiman was aware of this when entering into the contract with Sylvan.
This Court does not find Sylvan's conduct in closing centers to be inconsistent with its proffered business reasons for bidding on the NASD contract. Sylvan legitimately believed that any proposal to NASD had to include acquisition of the centers. NASD would have no need for testing centers once the testing was contracted out. NASD made it clear it wanted the centers and the assets off the books. Consequently, the decision to include the centers in the bid, and close centers were there excess capacity, is not inconsistent with Sylvan's desire to fill its under used capacity. Likewise, the decision to keep a few NASD centers open where additional coverage was needed does not refute the evidence of a legitimate business reason.
The second reason proffered by Sylvan is simply that it wanted NASD's business because NASD was considered a prestigious firm. Quite obviously, ACT cannot dispute this because ACT sought NASD's business for similar reasons. Having said that, however, the Court does not find this reason to be indicative of motive. A valid business reason must originate from more than a superfluous contention that a firm is prestigious. See c.f. Data General Corp., 36 F.3d at 1183 (finding defendant's business decision should originate from concerns about efficiency or quality control). It would seem that such a reason could be given in many acquisitions, and alone, should not be able to refute evidence of monopolistic intent. For this reason the Court does not place great weight on this business reason.
It is important to note at this point that ACT's attempt to challenge each of Sylvan's legitimate business reasons does not leave the Court without pause. But as this Court understands the case precedent, a valid business reason excuses otherwise seemingly anticompetitive conduct. See supra discussion pp. 6-7 ; See also c.f. Universal Analytics, In., 914 F.2d at 1259 (finding some evidence of anticompetitive motive is insufficient to undermine undisputed legitimate business reasons). Thus, because Sylvan's most persuasive reason is largely undisputed — that it was functioning under capacity, needed NASD's testing volume and the only way to ensure its bid was to acquire NASD testing centers — ACT's evidence of anticompetitive conduct cannot defeat what the Court finds to be a legitimate reason for the conduct.
Which brings the Court to the main issue raised in Sylvan's motion in limine — whether ACT should be permitted to admit evidence regarding damages it suffered from the loss of the NASD contract. Because the Court finds Sylvan's pursuit of the NASD contract was not anticompetitive, ACT cannot recover damages derived from legal conduct. Therefore, any evidence regarding ACT's lost profits from the loss of the NASD contract will be precluded.
For the reasons stated herein, Sylvan's motion in limine is granted in part, precluding ACT from introducing evidence of damages it incurred from the loss of the NASD contract. Sylvan's motion in limine also requested that the Court preclude evidence regarding ACT's claim of predatory pricing, Ms. Ford's report, ACT's market reports, and other evidence regarding issues that Sylvan maintains the Court has already resolved. Because the Court understands the present ruling essentially dismantles ACT's claim for damages, it is unclear what remains in the case. For that reason, the Court will schedule a hearing to determine how this case should be handled from this point forward, including the possibility of a Section 1292(b) certification to the Court of Appeals.