| LePage's, Inc. v. 3M | |
|---|---|
| | |
| Court | United States Court of Appeals for the Third Circuit |
| Full case name | LePage's, Incorporated; Lepage's Management Company, L.L.C. v. 3M (Minnesota Mining and Manufacturing Company); Kroll Associates, Inc. |
| Argued | July 12, 2001 |
| Reargued | October 30, 2002 |
| Decided | March 25, 2003 |
| Citation | 324 F.3d 141 |
| Case history | |
| Subsequent history | Cert. denied, 542 U.S. 953(2004) |
| Court membership | |
| Judges sitting | Edward R. Becker, Dolores Korman Sloviter, Anthony Joseph Scirica, Richard Lowell Nygaard, Samuel Alito, Theodore McKee, Thomas L. Ambro, Julio M. Fuentes, D. Brooks Smith, Morton Ira Greenberg ( en banc ) |
| Case opinions | |
| Majority | Sloviter, joined by Becker, Nygaard, McKee, Ambro, Fuentes, Smith |
| Dissent | Greenberg, joined by Scirica, Alito |
| Laws applied | |
| Keywords | |
LePage's Inc. v. 3M, 324 F.3d 141 (3d Cir. 2003), is a 2003 en banc decision of the United States Court of Appeals for the Third Circuit upholding a jury verdict against bundling . [1] Bundling is the setting of the total price of a purchase of several products or services over a period from one seller at a lower level than the sum of the prices of the products or services purchased separately from several sellers over the period. Typically, one of the bundled items (the "primary product" or "monopoly product" or "non-contestable product") is available only from the seller engaging in the bundling, while the other item or items (the "secondary product" or "contestable product") can be obtained from several sellers. [2] The effect of the bundling is to divert purchasers who need the primary product to the bundling seller and away from other sellers of only the secondary product. For that reason, the practice may be held an antitrust violation as it was in the LePage's case, in which the Third Circuit held that 3M engaged in monopolization in violation of Sherman Act § 2 by (1) offering rebates to customers conditioned on purchases spanning six of 3M's different product lines, and (2) entering into contracts that expressly or effectively required dealing exclusively with 3M.
3M manufactures Scotch Tape brand of tape, which accounted for 90% of the U.S. transparent tape market until the early 1990s, concededly a monopoly. Around 1980 LePage's decided to sell private label transparent tape, which is tape sold under the retailer's name rather than under the name of the manufacturer. By 1992, LePage's sold 88% of U.S. private label tape, which represented, however, only a small portion of the U.S. transparent tape market. LePage's sold its private label tape to retailers at a lower price to the retailer and the customer than branded tape such as Scotch Tape.
In response to the growth of this market segment, 3M entered this submarket with a second, "off brand" tape and private-label tape. In addition, 3M engaged in actions allegedly aimed at restricting the availability of cheap off-brand transparent tape to consumers, including establishing a bundling program that prevented LePage's from gaining or maintaining large volume sales. Allegedly, 3M maintained its monopoly by stifling growth of private label tape and by coordinating efforts aimed at large distributors to keep retail prices for Scotch Tape high. [3]
LePage's sued 3M, asserting that 3M used its monopoly over its Scotch Tape brand to gain a competitive advantage in the private-label tape portion of the transparent-tape market through the use of a "multi-tiered, bundled rebate" program. This program gave progressively higher rebates when customers purchased greater amounts of products in a number of 3M's different product lines. [4]
The jury returned a verdict for LePage's on the monopolization claim under § 2 of the Sherman Act, and assessed damages of $23 million. The jury found in 3M's favor on LePage's claims under § 1 of the Sherman Act and § 3 of the Clayton Act. [4]
Cross-appeals to the Third Circuit followed, and the court heard the case en banc.
The en banc court affirmed the jury verdict (7-3).
The Third Circuit majority began by explaining the issue before it:
The sole remaining issue and our focus on this appeal is whether 3M took steps to maintain [its monopoly] power in a manner that violated § 2 of the Sherman Act. A monopolist willfully acquires or maintains monopoly power when it competes on some basis other than the merits. [5]
LePage's argued that 3M willfully maintained its monopoly in the transparent tape market by bundling rebates and entering into contracts that expressly or effectively required dealing exclusively with 3M. 3M argued that its challenged conduct was legal because it never priced its transparent tape below its cost. The Third Circuit said this was "the most significant legal issue in this case because it underlies 3M's argument." 3M's position was that "above-cost pricing cannot give rise to an antitrust offense as a matter of law, since it is the very conduct that the antitrust laws wish to promote in the interest of making consumers better off." In its oral argument before the court, 3M counsel stated that "if the big guy is selling above cost, it has done nothing which offends the Sherman Act" and that is "the end of the story." [6]
The court was unwilling to accept 3M's argument that "no conduct by a monopolist who sells its product above cost—no matter how exclusionary the conduct—can constitute monopolization in violation of § 2 of the Sherman Act." The court said, "The history of the interpretation of § 2 of the Sherman Act demonstrates the lack of foundation for 3M's premise." [6] the Third Circuit insisted that the Supreme Court's "consistent holdings [were] that a monopolist will be found to violate § 2 of the Sherman Act if it engages in exclusionary or predatory conduct without a valid business justification." [7] The court then turned to 3M's specific acts.
3M offered many of LePage's major customers substantial rebates (often $1 million or more) to induce them to reduce or stop their purchases of tape from LePage's. 3M's rebate programs offered discounts to certain customers conditioned on purchases in six of 3M's diverse, unrelated product lines. The product lines covered by the rebate program were: Health Care Products, Home Care Products, Home Improvement Products, Stationery Products (including transparent tape), Retail Auto Products, and Leisure Time products. 3M's rebate programs set customer-specific target growth rates in each product line. The size of the rebate was linked to the number of product lines in which targets were met, and the number of targets met by the buyer determined the size of the rebate it would receive on all of its purchases. If a customer failed to meet the target for any one product, its failure would cause it to lose the rebate across the line. The court observed, "This created a substantial incentive for each customer to meet the targets across all product lines to maximize its rebates." The penalties for not meeting targets would have been hundreds of thousands of dollars." [8]
As in the SmithKline case, [9] "where we held that conduct substantially identical to 3M's was anticompetitive and sustained the finding of a violation of § 2," 3M's competitors did not have as diverse a product line and thus could not offer comparable discounts in net dollar terms. The "effect of 3M's rebates were even more powerfully magnified than those in SmithKline because 3M's rebates" applied to so much more extensive product lines. "In some cases, these magnified rebates to a particular customer were as much as half of LePage's entire prior tape sales to that customer." Therefore, "3M's conduct was at least as anticompetitive as the conduct which this court held violated § 2 in SmithKline." [10]
The court reviewed the evidence and concluded that the jury could reasonably find that 3M gave payments to retailers to deal exclusively with 3M, thereby foreclosing LePage's from that portion of the market. [11]
Finally, the court dismissed 3M's proffered justifications. There was evidence from which the jury could have determined that 3M intended to force LePage's from the market, and then cease or severely curtail its own private-label business in favor of its Scotch Tape sales, and that 3M wanted to "kill" the private-label market, because it was diverting Scotch Tape sales. [12]
The majority therefore concluded: "There was ample evidence that 3M used its market power over transparent tape, backed by its considerable catalog of products, to entrench its monopoly to the detriment of LePage's, its only serious competitor, in violation of § 2 of the Sherman Act." [13]
Judge Greenberg dissented, joined by Judge Scirica and Judge Alito, as to the monopolization claim, but agreed as to LePage's's cross-appeal from the motion granting 3M a judgment as a matter of law on the attempted maintenance of monopoly claim. Greenberg insisted that LePage's "simply did not establish that 3M's conduct was illegal, as LePage's did not demonstrate that 3M's pricing was below cost (a point that is not in dispute) and, in the absence of such proof, the record does not supply any other basis on which we can uphold the judgment." He disagreed with the majority's use of the SmithKline case. His view of the evidence was that LePage's lost private sale tape business for reasons not related to 3M's rebates. He added, "Contrary to the majority's view, this is not a situation in which there is no business justification for 3M's actions," because 3M's bundling created "efficiency in having single invoices, single shipments and uniform pricing programs for various products." He accused the majority of "curtailing price competition and a method of pricing beneficial to customers because the bundled rebates effectively lowered their costs."
3M petitioned the Supreme Court for certiorari, but the Court denied it. [14] Before deciding, the Court called for the views of the Solicitor General, who argued that it would be premature for the Supreme Court to rule on bundling until the issue of its legality had percolated more in the lower courts. [15]
● Professor Kauper, in his critique of the LePage's case, noted that the Third Circuit opinion "provoked a strong outcry from the business community," including a "large number of amicus briefs . . . filed in support of 3M's [unsuccessful] petition for certiorari, [14] all arguing that bundled rebates should be unlawful only" if the rebates made the sales below cost and, in addition, "suggesting all kinds of dire consequences should the Court of Appeals decision stand." [16] He points out that despite artifice, the petition (as does the case) "squarely raises the issue of whether Section Two liability can ever attach where the exclusion can be said to result from an above-cost price." [16] Kauper recognizes that "businesses would be comforted by a bright line, below cost standard—a kind of safe harbor against most claims of exclusion based on the pricing of a dominant firm," but he "take[s] the parade of horribles put forth by petitioner and its amici with a degree of skepticism." [17]
Kauper argues that bundling is a rebate subject to a condition. "Conditioned rebates essentially buy something the manufacturer wants and the buyer is prepared to give if the price is right." The effect, he says, is equivalent to an exclusive dealing agreement, and therefore the same analysis should be used (essentially, the rule of reason). "Exclusivity in limited circumstances could work to exclude rivals without legitimate justification. This should be the focus of the inquiry." That outcome (exclusivity) can be achieved without selling below cost. All that a below–cost requirement accomplishes is to show that "the rebates could not be matched by an equally efficient firm," but that should not be decisive. For example, "a new entrant or a small but expanding firm, for example, cannot be expected to have achieved the full economies of a dominant firm." [17]
● Professor Hovenkamp and his son discussed bundling from an econometric vantage, in an article in the Buffalo Law Review. [18] They begin by describing the different varieties of bundled discounts:
The terms can vary widely, here, "but the most obvious variables are (1) the number of goods in the bundle; (2) the proportion of the goods in the bundle, and whether the proportion is specified in an any sense or left completely up to the customer; and (3) the percentage share of its needs that the customer must purchase from the seller in order to obtain the discount." [18]
They then provide an example to show how a multi-product firm can place a firm with a smaller product line at a competitive disadvantage by using bundling, because the discount must be "amortized" over the larger or smaller range of products that the seller offers, so that the seller with the smaller range of goods over which to amortize the discount must offer a higher percentage discount to match the overall sum of the other's discounts:
[S]uppose that a dominant firm produces goods A and B at a cost of $5 and $7, respectively. It sells the two goods separately for $10 each per unit but offers a 20% discount to anyone who will take a bundle of one A good and one B good. Note that this discounted price, $16, is well above the firm's costs, which are $12. However, a rival sells only B, for which its production costs are also $7. If a customer wants the rival's B good it loses the discount from the dominant firm on the A good. As a result, the customer must pay $10 for the dominant firm's A, and at least $7, the cost price, for the rival firm's B. The rival will be unable to capture the sale of B even though it is equally efficient, in the sense that its production costs for B are the same as those faced by the dominant firm. [19]
They point out that the effect of the practice is to exclude B from the market even though B is an equally efficient producer and A's price is above cost. "[T]he practice is nevertheless 'exclusionary' in the sense that the rival cannot profitably compete with it, at least to those customers who wish to purchase As and Bs together and in equal amounts. [19] They explain, "What the antitrust cases involving bundled discounts have in common is that the rival makes only a subset of the goods in the bundle and cannot readily add in the extra goods that would enable it to produce the full range." [20]
They explain further how a dominant multi-product firm can exclude small rivals with only small bundling discounts:
[S]uppose that the dominant firm makes 10 products that cost $9 each and sell individually for $10 each, but offers a 2% discount to those who take a full set, resulting in a price of $98. The rival makes only product, number 10, which it can sell to the customer for $9, but then the customer will have to pay $90 for the other 9 products from the dominant firm, for a total of $99. . . . Indeed, in this particular example any discount above 1% will exclude the rival from the trade of those customers who want the entire package; but such trivial discounts are almost certainly justified by cost savings in contracting or delivery, if not in production. [21]
The authors conclude that bundling practices are so diverse that it is difficult to generalize whether a given bundling practice is harmful, but the "type of multi-product bundling most likely to cause harm is that which was at issue in LePage's, where the defendant offered evidently custom-made bundles to different large customers in order to get them to drop the plaintiff's line of cellophane tape." [22]
● John Thorne, in a 2005 article, argues "that a dominant firm's offering above-cost discounts for volume purchases, of either individual products or multiple products, should be per se lawful under Section 2 of the Sherman Act even if the lower prices tend to shift business away from single-product rivals." [23] He bases this conclusion on three premises:
First, discounted bundles are commonly offered by firms having no market power whatsoever, and therefore no special suspicion should arise when dominant firms offer them. Second, the common offering of bundles is due to numerous efficiency advantages from the point of view of producers and consumers. Third—and the reason that above-cost bundles should not be just presumptively lawful but per se lawful—fact finders are not able reliably to distinguish between efficient bundles and those whose anticompetitive effects outweigh efficiency. Discounted bundles are an area in which the medical profession's oath "first do no harm" is fully applicable. Courts should be especially reluctant to interfere when a dominant firm offers its customers a price break. [24]
He insists that the present legal regime, with its uncertainties for business, creates too great a risk that "condemnation otherwise will rest on sympathy for small firms and distaste for large firms' pursuit of every possible sale, perversely punishing economies of scale and aggressive rivalry that benefit the economy." Not only do juries lack competence to evaluate the balance between anticompetitive and procompetitive aspects of bundling, but so do courts. Deciding what are proper bundles may be "beyond the practical ability of a judicial tribunal to control." [25]
A monopoly is a market in which one person or company is the only supplier of a particular good or service. A monopoly is characterized by a lack of economic competition to produce a particular thing, a lack of viable substitute goods, and the possibility of a high monopoly price well above the seller's marginal cost that leads to a high monopoly profit. The verb monopolise or monopolize refers to the process by which a company gains the ability to raise prices or exclude competitors. In economics, a monopoly is a single seller. In law, a monopoly is a business entity that has significant market power, that is, the power to charge overly high prices, which is associated with unfair price raises. Although monopolies may be big businesses, size is not a characteristic of a monopoly. A small business may still have the power to raise prices in a small industry.
In the United States, antitrust law is a collection of mostly federal laws that govern the conduct and organization of businesses in order to promote economic competition and prevent unjustified monopolies. The three main U.S. antitrust statutes are the Sherman Act of 1890, the Clayton Act of 1914, and the Federal Trade Commission Act of 1914. These acts serve three major functions. First, Section 1 of the Sherman Act prohibits price fixing and the operation of cartels, and prohibits other collusive practices that unreasonably restrain trade. Second, Section 7 of the Clayton Act restricts the mergers and acquisitions of organizations that may substantially lessen competition or tend to create a monopoly. Third, Section 2 of the Sherman Act prohibits monopolization.
Price discrimination is a microeconomic pricing strategy where identical or largely similar goods or services are sold at different prices by the same provider to different buyers based on which market segment they are perceived to be part of. Price discrimination is distinguished from product differentiation by the difference in production cost for the differently priced products involved in the latter strategy. Price discrimination essentially relies on the variation in customers' willingness to pay and in the elasticity of their demand. For price discrimination to succeed, a seller must have market power, such as a dominant market share, product uniqueness, sole pricing power, etc.
In marketing, product bundling is offering several products or services for sale as one combined product or service package. It is a common feature in many imperfectly competitive product and service markets. Industries engaged in the practice include telecommunications services, financial services, health care, information, and consumer electronics. A software bundle might include a word processor, spreadsheet, and presentation program into a single office suite. The cable television industry often bundles many TV and movie channels into a single tier or package. The fast food industry combines separate food items into a "combo meal" or "value meal".
Pricing is the process whereby a business sets and displays the price at which it will sell its products and services and may be part of the business's marketing plan. In setting prices, the business will take into account the price at which it could acquire the goods, the manufacturing cost, the marketplace, competition, market condition, brand, and quality of the product.
Tying is the practice of selling one product or service as a mandatory addition to the purchase of a different product or service. In legal terms, a tying sale makes the sale of one good to the de facto customer conditional on the purchase of a second distinctive good. Tying is often illegal when the products are not naturally related. It is related to but distinct from freebie marketing, a common method of giving away one item to ensure a continual flow of sales of another related item.
The list price, also known as the manufacturer's suggested retail price (MSRP), or the recommended retail price (RRP), or the suggested retail price (SRP) of a product is the price at which its manufacturer notionally recommends that a retailer sell the product.
Predatory pricing is a commercial pricing strategy which involves the use of large scale undercutting to eliminate competition. This is where an industry dominant firm with sizable market power will deliberately reduce the prices of a product or service to loss-making levels to attract all consumers and create a monopoly. For a period of time, the prices are set unrealistically low to ensure competitors are unable to effectively compete with the dominant firm without making substantial loss. The aim is to force existing or potential competitors within the industry to abandon the market so that the dominant firm may establish a stronger market position and create further barriers to entry. Once competition has been driven from the market, consumers are forced into a monopolistic market where the dominant firm can safely increase prices to recoup its losses.
In marketing, a rebate is a form of buying discount and is an amount paid by way of reduction, return, or refund that is paid retrospectively. It is a type of sales promotion that marketers use primarily as incentives or supplements to product sales. Rebates are also used as a means of enticing price-sensitive consumers into purchasing a product. The mail-in rebate (MIR) is the most common. An MIR entitles the buyer to mail in a coupon, receipt, and barcode in order to receive a check for a particular amount, depending on the particular product, time, and often place of purchase. Rebates are offered by either the retailer or the product manufacturer. Large stores often work in conjunction with manufacturers, usually requiring two or sometimes three separate rebates for each item, and sometimes are valid only at a single store. Rebate forms and special receipts are sometimes printed by the cash register at time of purchase on a separate receipt or available online for download. In some cases, the rebate may be available immediately, in which case it is referred to as an instant rebate. Some rebate programs offer several payout options to consumers, including a paper check, a prepaid card that can be spent immediately without a trip to the bank, or even as a PayPal payout.
A business can use a variety of pricing strategies when selling a product or service. To determine the most effective pricing strategy for a company, senior executives need to first identify the company's pricing position, pricing segment, pricing capability and their competitive pricing reaction strategy. Pricing strategies and tactics vary from company to company, and also differ across countries, cultures, industries and over time, with the maturing of industries and markets and changes in wider economic conditions.
In United States antitrust law, monopolization is illegal monopoly behavior. The main categories of prohibited behavior include exclusive dealing, price discrimination, refusing to supply an essential facility, product tying and predatory pricing. Monopolization is a federal crime under Section 2 of the Sherman Antitrust Act of 1890. It has a specific legal meaning, which is parallel to the "abuse" of a dominant position in EU competition law, under TFEU article 102. It is also illegal in Australia under the Competition and Consumer Act 2010 (CCA). Section 2 of the Sherman Act states that any person "who shall monopolize. .. any part of the trade or commerce among the several states, or with foreign nations shall be deemed guilty of a felony." Section 2 also forbids "attempts to monopolize" and "conspiracies to monopolize". Generally this means that corporations may not act in ways that have been identified as contrary to precedent cases.
Aftermarket in economic literature refers to a secondary market for the goods and services that are complementary or related to the primary market goods, also known as original equipment). In many industries, the primary market consists of durable goods, whereas the aftermarket consists of consumable or non-durable products or services.
Morton Ira Greenberg was a United States circuit judge of the United States Court of Appeals for the Third Circuit. He was nominated by President Ronald Reagan on February 11, 1987 and was confirmed by the United States Senate on March 20, 1987. He assumed senior status on June 30, 2000.
Article 102 of the Treaty on the Functioning of the European Union (TFEU) is aimed at preventing businesses in an industry from abusing their positions by colluding to fix prices or taking action to prevent new businesses from gaining a foothold in the industry. Its core role is the regulation of monopolies, which restrict competition in private industry and produce worse outcomes for consumers and society. It is the second key provision, after Article 101, in European Union (EU) competition law.
Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985), was a United States Supreme Court case that decided whether a dominant firm's unilateral refusal to deal with a competitor could establish a monopolization claim under Section 2 of the Sherman Act. The unanimous Supreme Court agreed with the 10th Circuit that terminating a pro-consumer joint venture without a legitimate business justification could constitute illegal monopolization. However, its decision created an exception to the general rule that firms can decide with whom to do business absent collusion, sparking significant controversy about the appropriate scope of this exception. In a subsequent case, Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP, Justice Scalia, writing for the majority, stated that Aspen Skiing is "at or near the outer boundary of § 2 liability." Although its holding has been narrowed, this case's relevance remains contested, especially in the context of refusals to license intellectual property.
Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451 (1992), is a 1992 Supreme Court decision in which the Court held that even though an equipment manufacturer lacked significant market power in the primary market for its equipment—copier-duplicators and other imaging equipment—nonetheless, it could have sufficient market power in the secondary aftermarket for repair parts to be liable under the antitrust laws for its exclusionary conduct in the aftermarket. The reason was that it was possible that, once customers were committed to the particular brand by having purchased a unit, they were "locked in" and no longer had any realistic alternative to turn to for repair parts.
United States v. Parke, Davis & Co., 362 U.S. 29 (1960), was a 1960 decision of the United States Supreme Court limiting the so-called Colgate doctrine, which substantially insulates unilateral refusals to deal with price-cutters from the antitrust laws. The Parke, Davis & Co. case held that, when a company goes beyond "the limited dispensation" of Colgate by taking affirmative steps to induce adherence to its suggested prices, it puts together a combination among competitors to fix prices in violation of § 1 of the Sherman Act. In addition, the Court held that when a company abandons an illegal practice because it knows the US Government is investigating it and contemplating suit, it is an abuse of discretion for the trial court to hold the case that follows moot and dismiss it without granting relief sought against the illegal practice.
SmithKline Corp. v. Eli Lilly and Co., 575 F.2d 1056, is a 1978 decision of the United States Court of Appeals for the Third Circuit that first considered the price-discounting practice now termed bundling. Bundling is the setting of the total price of a purchase of several products or services from one seller at a lower level than the sum of the prices of the products or services purchased separately from several sellers. Typically, one of the bundled items is available only from the seller engaging in the bundling, while the other item or items can be obtained from several sellers. The effect of the practice is to divert purchasers who need the primary product to the bundling seller and away from other sellers of only the secondary product. For that reason, the practice may be held an antitrust violation as it was in the SmithKline v. Lilly case, in which the Third Circuit held that Lilly engaged in monopolization in violation of Sherman Act § 2.
Bundling is the setting of the total price of a purchase of several products or services from one seller at a lower level than the sum of the prices of the products or services purchased separately from several sellers. Typically, one of the bundled items is available only from the seller engaging in the bundling, while the other item or items can be obtained from several sellers. The effect of the practice is to divert purchasers who need the primary product to the bundling seller and away from other sellers of only the secondary product. For that reason, the practice may be held an antitrust violation as it was in SmithKline Corp. v. Eli Lilly & Co. and LePage's, Inc. v. 3M.
Raising rivals' costs is a concept or theory in United States antitrust law describing a tactic or device to gain market share or exclude competitors. The origin of the concept has been attributed to Professors Aaron Director and Edward H. Levi of the University of Chicago Law School, who wrote briefly in 1956 that a firm with monopoly power can decide to impose additional costs on others in an industry for exclusionary purposes. They stated that such a tactic "might be valuable if the effect of it would be to impose greater costs on possible competitors."
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