FTC Flushes McWane in a Big Eleventh Circuit Exclusive Dealing Win
The situations where exclusive dealing guidelines, explicit or associated with a hostile discounting program, mix the road underneath the rule-of-reason remain not even close to obvious. Since it involved appellate overview of a Ftc (“FTC” or even the “Commission”) ruling – where deference towards the agency on certain findings performed a significant part – the Eleventh Circuit’s April 15th decision upholding the FTC’s ruling that McWane, Corporation. (“McWane”) enforced an unlawful exclusive dealing policy needing marketers to buy all their domestic ductile iron pipe fittings from McWane (or face losing all rebates and being without supply for 12 days) provides important guideposts. A Legal Court held that McWane’s program avoided worldwide competitors from entering the domestic market, effectively maintained McWane’s monopoly on domestic fittings, and confirmed the FTC’s order on all counts.
Factual and Procedural Background
Ductile iron pipe fittings join pipes and direct the flow of pressurized water in municipal water pipeline systems. Despite 1000’s of potential and custom designs, most the demand is perfect for about 100 common fittings. When cities issue specifications for pipeline development, they are able to specify for either “open” fittings – which enables fittings made all over the world – or “domestic” fittings, that are only individuals produced in the U . s . States. The pipe fittings market, whether or not open or domestic, continues to be largely controlled by three major producers: McWane, Star Pipe Items (“Star”) and Sigma Corporation (“Sigma”), who combined own nearly 90% of national share of the market.
Within the domestic fittings market, McWane held the whole market until mid-2009 when Star introduced it might begin offering domestic fittings. In reaction, McWane implemented its “Full Support Program” “to safeguard [its] domestic brands and market position,” by telling clients that without buying their full needs from McWane, hose clients wouldn’t receive domestic fitting rebates as well as their deliveries could be postponed by 12 days.1 McWane’s executives mentioned internally that the objective of this program ended up being to raise Star’s costs and prevent Star from competing within the domestic fittings market. Because of this program, Star never opened up a domestic foundry of their own and it was consigned to some nominal domestic fittings share of the market.
In May 2013, the FTC’s administrative law judge released a viewpoint discovering that McWane’s program constituted illegal exclusive dealing which had foreclosed Star in the domestic fittings market and unlawfully maintained its monopoly. The Commission, on benefit of the ALJ’s decision, confirmed the ruling. McWane become a huge hit towards the Eleventh Circuit.
The Court’s Analysis Largely Defers to the FTC’s Determinations
On appeal, McWane challenged three specific Commission determinations: (1) the domestic fittings market was the appropriate antitrust market, (2) that McWane monopolized the appropriate market, and (3) the Full Support Program injured competition. Significantly, a lot of the Court’s decision switched around the question of if the appealable question was factual, economic, or legal. Towards the extent McWane’s challenges were factual or economic conclusions, a legal court deferred towards the Commission’s findings.
A Legal Court confirmed the Commission’s market definition because municipal clients who have been restricted to federal, condition, or local laws and regulations to buy domestically-manufactured fittings didn’t have viable alternative when dealing with McWane’s repeated cost increases. A Legal Court declined McWane’s arguments calling the Commission’s economic expert inadequate for neglecting to assess the mix-elasticity of demand, proclaiming that “there seems to become no support within the situation law for McWane’s declare that this type of technical analysis is definitely needed.”2 The qualitative economic evidence and also the Brown Shoe factors were sufficient evidence to uphold the Commission’s relevant market.
A Legal Court discovered that the Commission’s determination that McWane had monopoly power was based on substantial evidence, even when a number of that evidence cut roughly from the Commission’s ruling. Once the Full Support Program was developed, McWane held the whole market, however the next 3 years saw Star gradually eroding McWane’s share to 90%. The truth that Star selected up 10% share recommended towards the Court that entry was possible and never restricted to McWane’s efforts. But, crucially, a legal court discovered that McWane’s capability to frequently increase domestic fittings’ prices precluded it from overturning the FTC’s finding of monopoly power.
A Legal Court then addressed whether McWane’s program constituted monopoly maintenance under a unique dealing theory. A Legal Court employed an altered rule-of-reason burden-shifting regime to evaluate the issue but noted that within an exclusive dealing context, it has to consider if the alleged plan caused substantial market property foreclosure.3
- First, the Eleventh Circuit rejected McWane’s argument that its program was presumptively legal because it was both short-term and voluntary. Instead, the Court found that the program had the practical effect of requiring compliance for distributors to remain competitive — it was “economically infeasible for distributors” to switch to Star.4
- Second, the program resulted in substantial foreclosure of competition by preventing Star from accessing the two major distributors who control over 60% of the downstream domestic pipe fittings market, and several critical distributors denied Star any business for fear of losing their McWane supply. Plus, direct pricing evidence showed that McWane maintained supracompetitive prices in the domestic market, which it monopolized, when compared with the imported market, in which it faced significant competition.
- Finally, the Court held that the program held none of the traditional procompetitive benefits of an exclusive dealing contract, such as firms competing for exclusivity by offering lower prices, better services, and other benefits. Exclusive dealing, though, can be anticompetitive if it results in raising rivals’ costs to prevent them from becoming effective competitors. Here, the program was “unilaterally imposed by fiat” and showed no resulting procompetitive benefits.5
McWane argued two benefits: (1) the program retained sufficient sales to keep its domestic foundry from going out of business, and (2) the Full Support Program was necessary to keep Star from only producing the 100 fittings that account for nearly 80% of the fittings market. The Court found that neither was an unlawful act, but that neither was a procompetitive justification. Perhaps more importantly, McWane’s own internal documents, to which the Court refers, say that the “chief concern” was to lock Star out of the market.6
Lessons Learned: Qualitative Economics, The Right Appeal, and Bad Documents
This decision in support of the company includes a couple of critical take-aways to paint future agency (and complaintant) exclusive dealing cases. First, antitrust liability migh result even when the alleged exclusive dealing conduct only slows a competitor’s entry in to the market. Here, McWane’s program didn’t completely prevent Star from entering, but rather only limited their market growth to 10% share of the market in domestic fittings throughout the period McWane enforced this program. Despite the fact that substantial entry, a legal court discovered that slowing down, instead of preventing or completely foreclosing, entry was sufficient to carry McWane liable.
Second, though some academic literature claim that mix-elasticity of demand may be the ultimate goal of market definition, qualitative measures, the hypothetical monopolist test, along with other classical way of antitrust market definition remain viable. There’s no requirement – at the moment and under this decision – for any complaintant or even the government to demonstrate its market definition through this kind of expansive test. Though this holding is for sure more complaintant-friendly, you will find possibilities for any defendant to make use of the greater rigorous mix-elasticity measures to show the proffered market definition can’t be accurate.
Third, it’s a difficult appealable position to challenge the FTC’s factual and economic determinations, specially when the caliber of review on appeal is really deferential towards the agency. Structuring individuals challenges as attracts the FTC’s use of what the law states of individuals details will give you defendants having a second bite in the proverbial apple by needing the appeals court to conduct its very own de novo review, instead of simply deferring towards the agency’s judgment and needing the defendant to beat individuals presumptions.
Finally, as has frequently been the situation in merger contexts, bad documents once again “poisoned the well” for that defendant. A legal court reported frequently to individuals McWane’s documents that “patted on their own the back” for his or her efforts to seal Star from the market by needing marketers to purchase the entire type of McWane fittings. The boasting, the frank commentary, and also the internal exchange from the program’s success only offered to help bolster the Commission’s claims the conduct had significant anticompetitive effects. Furthermore the documents help color, otherwise prove the government’s situation, they also allow it to be challenging for that court to endorse a defendant’s procompetitive justifications.
As Federal trade commission Chairwoman Edith Ramirez has immediately placed the choice, “The Eleventh Circuit’s decision affirms that monopolists must compete around the merits instead of turning to anticompetitive tactics to exclude would-be market entrants.”
1McWane, Inc. v. FTC, Slip Op., No. 14-11363 (11th Cir. April 15, 2015), available at https://www.ftc.gov/system/files/ documents/cases/150415mcwanedecision.pdf.
2Id. at 26.
3Id. at 40.
4Id. at 37.
5Id. at 37-38 (citing ALJ Op.)
6Id. at 54.