- Brunswick Revisited: Antitrust Injury in a Competitor’s Merger Challenge
- June 6, 2012 | Authors: Adam L. Hudes; Carmine R. Zarlenga
- Law Firm: Mayer Brown LLP - Washington Office
In fall 2011, antitrust plaintiffs were put on notice that the requirement of antitrust injury was alive and well and might be applied rigorously in competitor suits. In Sterling Merchandising, Inc. v. Nestlé, S.A., the US Court of Appeals for the First Circuit affirmed summary judgment for defendants, dismissing a competitor's antitrust claims against Nestlé S.A. concerning a merger that allegedly increased concentration among ice cream distributors in Puerto Rico.
Following the merger, plaintiff Sterling Merchandising's sales and market share actually increased, but Sterling alleged that, but for the merger and resulting anticompetitive activities, it would have performed even better. The First Circuit rejected plaintiff's argument that it had established antitrust injury, reasoning that Sterling had failed to prove any increase in prices or reduction in output. Significantly, the First Circuit noted that plaintiffs' post-merger success was a "further indication" (i.e., evidence) that no antitrust injury existed. While the future impact of this aspect of the ruling is yet unknown, it may serve to raise the bar for future antitrust plaintiffs who have achieved success in the aftermath of an alleged antitrust violation.
Antitrust Injury and the Competitor-Plaintiff
Though the antitrust injury question is now a standard feature in private antitrust cases, it was a question no one asked until the Supreme Court's 1977 decision in Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc.1 In Brunswick, a plaintiff group of bowling alley operators charged that Brunswick, the leading maker of bowling equipment, had made a series of bowling center acquisitions that were illegal under Section 7 of the Clayton Act because the "failing company" doctrine had not been properly applied. In that context, the plaintiffs alleged that their centers would have been more profitable if some of the Brunswick-acquired centers had instead gone out of business.2
The court rejected this theory, noting that the survival of the centers, in whatever hands, was pro-competitive.3 Indeed, plaintiffs' theory was "designed to provide them with the profits they would have realized had competition been reduced," a resolution that would have been "inimical to the purposes of the [antitrust] laws."4 Private antitrust plaintiffs were, from then on, required to demonstrate the existence of "antitrust injury," or "injury of the type the antitrust laws were intended to prevent and that flows from that which makes defendants' acts unlawful."5 In other words, an antitrust plaintiff must show not only that it has been injured as a result of the defendant's actions and that those actions constitute an antitrust violation, but also that its injury stems from conduct that reduces output or that raises prices to consumers.
The antitrust injury requirement is particularly important in suits brought by competitors, as was the case in Sterling. Competitors are far more prone to complain about too much competition, rather than an absence of it. For instance, even if a competitor is stymied because a merger of its rivals makes them more efficient or able to compete more aggressively, that new market reality is not an antitrust violation, and the competitor thus lacks standing. Further, unlike consumers, competitors have incentives to bring antitrust suits for purposes that are anticompetitive, such as inducing the defendant competitor to moderate its competition. As a result, there is good reason for courts to be "properly skeptical of many rivals' suits, particularly when the practices are not obviously ‘exclusionary.'"6
Notwithstanding this skepticism, a competitor's allegations of anticompetitive exclusion, if properly framed, will satisfy at least initial scrutiny. The question then becomes one of proof: what evidence exists that the anticompetitive conduct injured the plaintiff and injured competition? A competitor-plaintiff will typically proffer evidence of some form of decreased sales or profits and of increased market prices or other effects that negate competition. To bolster its story, a plaintiff will attempt to "connect the dots" between injury to itself and antitrust injury. For instance, a plaintiff may argue that its lost sales and market share reflect a reduced level of competition that has enabled the defendant to raise prices to consumers.
This story is less compelling, if not doubtful, when a competitor-plaintiff's performance has actually improved following the alleged anticompetitive conduct. To be sure, "an antitrust plaintiff's post-violation successes do not necessarily preclude compensation for damages proximately caused by an antitrust violation."7 A plaintiff may be able to establish that, but for the alleged violation, its sales or profits would have increased even more than they did, which can be a viable demonstration of injury in fact (though perhaps a more difficult one than if the plaintiff had fared worse following the alleged violation). However, even if a plaintiff can establish injury in fact under these circumstances, antitrust injury will require evidence that explains how a plaintiff's relative success squares up with a supposed lessening of competition. What consideration (if any) should be given to a plaintiff's success in considering the existence of antitrust injury?
Sterling: the Factual Background
Plaintiff Sterling alleged violations of the Sherman Act, the Clayton Act and the Puerto Rico Anti-Monopoly Act arising from the 2003 merger between Nestlé P.R. and Payco, two of Puerto Rico's largest ice cream distributors. Also at issue was Nestlé S.A.'s 2003 acquisition of Dreyer's, the parent company and manufacturer of Edy's brand ice cream, Sterling's best-selling product line. Prior to Nestlé S.A.'s acquisition of Dreyer's, Sterling had been the exclusive distributor of Edy's in Puerto Rico. The Nestlé P.R. acquisition of Payco was approved by the Puerto Rico Office of Monopolistic Affairs (PROMA) on the condition that distribution rights to Edy's could not be removed from Sterling without prior PROMA approval.8
The parties agreed that prior to the 2003 Nestlé P.R.-Payco merger, the market in Puerto Rico was competitive, with no distributor possessing market power.9 Immediately after the merger, the new Nestlé P.R. (including Payco) had an 85 percent share of the ice cream distribution market in Puerto Rico.10 However, by 2007, that market share had fallen to 70 percent.11 Conversely, during the period following the merger, Sterling's market share and sales actually increased (nearly doubling in size from 2003 to 2008), and Sterling acquired distribution rights for additional ice cream brands.12 Overall, Sterling's sales grew more than 11 percent per year following the merger.13 Sterling's market share also increased year over year. Following the merger, Nestlé P.R. also lost several exclusive distribution arrangements with key retailers.14
While Sterling retained its exclusive distribution rights to Edy's in Puerto Rico, Dreyer's decreased its per unit promotional support on Edy's products, citing increased costs of raw materials.15 Dreyer's also terminated Sterling's distribution of the Skinny Cow ice cream line, which it now distributes through Nestlé P.R.16
In an effort to show injury to itself in the face of its growing success following the 2003 transactions, Sterling alleged that, absent the 2003 Nestlé P.R.-Payco merger, it would have thrived even more than it did. Sterling alleged that, following its merger with Payco, Nestlé was able to enter exclusive arrangements with numerous grocery stores that foreclosed Sterling from certain segments of the market.17 Also, according to Sterling, "absent this market foreclosure, it would have earned higher profits" on its sales due to increased efficiencies of scale realized as a result of its growing operation.18 Sterling also alleged it was damaged by the increase in price on Edy's and by the loss of Dreyer's Skinny Cow brand.19
District Court Ruling
After extensive discovery, the district court granted defendants' motion for summary judgment, concluding that Sterling had presented no evidence of restricted output or of increased prices (citing some prices that had actually fallen). Further, the court noted that Sterling's claims of any injury to itself were severely undermined by its increased profits, sales and market share in the post-merger period.20 The district court also rejected Sterling's damages model, stating that "it is unrealistic to posit that the company's sales and market presence would have grown four-fold had the Nestlé-Payco merger never occurred."21 Even if Sterling had somehow shown an injury to itself, the district court reasoned, it had not shown that it was injured by anticompetitive activity.
As to the allegations on exclusive contracts, the district court found that such contracts had been in use in Puerto Rico since the 1990s, that Nestlé P.R. had actually decreased its reliance on such contracts, and that the contracts were, in any event, reasonable.22 Sterling's claims of a price squeeze (from the increase in price on Edy's) were also rejected as a basis for antitrust injury, because there was no evidence that the competitive structure of the market had been harmed.23 Finally, as to the termination of Sterling's rights to distribute the Skinny Cow brand, the district court noted that Dreyer's had no legal duty to deal with Sterling and that, in any event, Sterling's increased sales and market share belied any antitrust injury.24
The First Circuit Affirms
In its appeal, Sterling argued that the "District Court's opinion was permeated by its erroneous view that evidence of Sterling's increased sales, profits, and market share was dispositive of the issue of antitrust injury," and cited a series of opinions from other circuits in support.25 Sterling further argued that the "District Court failed to recognize the altered competitive landscape that prevailed after 2003, in which [Nestlé-Payco] wielded unremunerative exclusive dealing agreements to preserve its overwhelming market share, while keeping Sterling in its place and other competitors out of the market altogether."26 According to Sterling, had the Nestlé-Payco merger not taken place, and had Sterling's Edy's discounts remained at pre-merger levels, "purchasers would have been offered more choice in more locations at more competitive prices, and Sterling would have gained even more market share."27
The First Circuit Court of Appeals was unmoved. Consistent with the lower court's analysis, the First Circuit held that Sterling had failed to show any injury to competition or to consumers. The court found that Sterling's expert did not analyze the effect of the merger on pricing to consumers, and it noted that other evidence indicated that ice cream prices to consumers actually decreased from 2003 to 2007.28 The court also found that Sterling failed to show that output was reduced or that customers "were forced to choose between less preferred brands."29 With regard to the exclusive dealing agreements, the court noted that Sterling had failed to show that the agreements had violated the antitrust law, which foreclosed less than 30 percent of market during the relevant time period and were nearly all for a one- to-two-year duration.30 Consequently, even if the exclusive arrangements were a source of injury to Sterling, they could not form the basis of antitrust injury.
The court went on to expressly highlight Sterling's post-merger success, noting "that Sterling's sales, profits, and market share have increased during the relevant period [and that this increase] provides further indication that no antitrust injury exists here."31 Indeed, Nestlé P.R. actually lost several large accounts to Sterling and other competitors during the relevant time period, which indicated an increase, rather than a decrease, in competition. Moreover, the court noted that Sterling's claim of injury was premised on a market without any exclusive agreements—an assumption the court described as "erroneous," given that such vertical agreements are often pro-competitive and had been in use in Puerto Rico since before the merger.32
The First Circuit's holding in Sterling does much to reinforce and further refine the requirement of antitrust injury, with a particular emphasis on its application to competitor suits. In a modern-day ruling reminiscent of Brunswick, the First Circuit made clear that a change in market structure (in this case, the merger of two competitors) was not sufficient on its own to establish antitrust injury. Moreover, the First Circuit was obviously skeptical of Sterling's antitrust injury claim in light of its well-documented post-merger success. The First Circuit was careful not establish a bright-line rule or presumption regarding a competitor whose performance did not decline following an alleged violation. But a fair reading of the ruling suggests, at minimum, that a competitor's post-violations success may be an albatross vis-à-vis establishing antitrust injury.
The First Circuit's skepticism also extended to Sterling's "but-for world," upon which injury of any sort (to Sterling or to competition in general) was dependent. Given Sterling's recent success, the First Circuit seemed particularly unwilling to allow injury to be established via a but-for world that could only be described as fanciful relative to the history and economic realities of the market.
The Sterling ruling is likely to have continuing impact in markets and industries where consolidation will inevitably lead to competitor suits similar to the one brought by Sterling. The question will continue to be posed: Does consolidation lead to increased efficiencies or anticompetitive outcomes? In answering the inquiry, plaintiffs in future cases will undoubtedly attempt to limit the Sterling holding to its facts. However, the skepticism reflected in Sterling is entirely consistent with the precedent established by the US Supreme Court in Brunswick and should help to frame the antitrust injury analysis in competitor cases moving forward.
1 429 U.S. 477, 489 (1977).
2 Id. at 477-81.
3 Id. at 488.
5 Id. at 489.
6 2 Areeda & Hovenkamp, Antitrust Law, ¶ 348a, at 387 (2d. ed. 2000).
7 Sterling Merch., Inc. v. Nestlé, S.A., 656 F.3d 112, 122 (1st Cir. 2011) (quoting Pierce v. Ramsey Winch Co., 753 F.2d 416, 436 (5th Cir. 1985)).
8 Id. at 116.
9 Id. at 115.
10 Id. at 116.
12 Id. at 116-17.
14 Id. at 116.
15 Id. at 117.
20 See Sterling Merch., Inc. v. Nestlé, S.A., 724 F. Supp. 2d 245 (D.P.R. 2010).
21 Id. at 262.
22 Id. at 260-61, 264-66.
23 Id. at 261.
24 Id. at 270-72.
25 Brief for Appellant at 38, Sterling Merch., Inc. v. Nestlé, S.A., No. 10-1925 (1st Cir. December 22, 2010).
26 Id. at 40.
27 Sterling, 656 F.3d at 120-21.
28 Id. at 122
30 Id. at 124.
31 Id. at 122-123.
32 Id. at 123 n5.