United States: Dentsply: Alleged Monopolist’s Exclusive Contracts Held Not To Be a U.S. Antitrust Violation

In United States v. Dentsply International, Inc., Civil Action No. 99-005-SLR (D. Del. Aug. 8, 2003), the District Court rejected the claim by the Department of Justice ("DOJ") that exclusive agreements between Dentsply International, Inc. ("Dentsply"), a manufacturer of prefabricated artificial teeth, and its dealers violate Sections 1 and 2 of the Sherman Act and Section 3 of the Clayton Act. The exclusive agreements at issue were: (1) Dentsply’s agree-ments with dealers that they will lose the right to distribute Dentsply teeth if they begin to carry a competing brand of teeth ("Dealer Criterion 6") and (2) Dentsply’s agreements with new dealers to drop some or all competing brands of teeth they previously carried to gain the right to distribute Dentsply teeth in the first place.¹ The DOJ has filed a notice of appeal in response to this decision.

Historically, manufacturers of artificial teeth have distributed their teeth one of three ways: (1) direct distribution to dental laboratories, (2) distribution through dental dealers, or (3) a combination of direct distribution to dental laboratories and distribution through dental dealers.² Dental laboratories construct dentures according to prescriptions and impressions provided by the dentist. ³ Dental dealers distribute artificial teeth to dental laboratories and/or dentists.⁴ Dentsply sells its artificial teeth exclusively to independent dental dealers,⁵ which compete with each other on price to sell Dentsply’s teeth to dental laboratories.⁶ Dentsply has long maintained a dominant position in the market for the sale of prefabricated artificial teeth in the United States, with market shares of 75-80% on a revenue basis and 67% on a unit basis.⁷ Twelve or thirteen manufacturers sell artificial teeth in the United States;⁸ two of those manufacturers, Ivoclar Vivadent AG and Vita Zahnfabrik, are considered Dentsply’s primary competitors.⁹

The court defined the relevant product market as the sale of prefabricated artificial teeth in the United States.¹⁰ Although it offered no explicit rationale, its market definition seems to follow from the court’s findings that: (1) dental laboratories are the relevant consumers of artificial teeth, because usually they, not dentists, choose the brands of teeth used to make dentures;¹¹ and (2) direct distribution to dental laboratories is a viable alternative to distribution through dealers. Applying a balancing approach under the rule of reason, the court held that the DOJ failed to prove that Dentsply violated Section 1 of the Sherman Act and Section 3 of the Clayton Act.¹² First, the court reasoned that Dentsply’s exclusive agreements with dealers neither "foreclose a substantial share of the market" nor "present an unreasonable restraint on competition" because direct distribution to dental laboratories is a "viable and, in some ways, advantageous" means of distribution.¹³ The court noted that direct distribution could deprive Dentsply, or any other manufacturer that uses dealers, of "significant levels of business" and that the DOJ’s own expert agreed that manufacturers competing with Dentsply are not "foreclosed from a substantial share" of dental laboratories.¹⁴ Moreover, the court observed that the DOJ provided no evidence that dental laboratories "feel ‘precluded from dealing with other manufacturers.’"¹⁵

Second, the court reasoned that Dentsply’s exclusive agreements with dealers do not foreclose competition in the market because some unstated number of dealers other than the 23 used by Dentsply are "available" to competing manufacturers.¹⁶ The DOJ argued that Dentsply’s rivals cannot effectively compete without access to Dentsply’s dealers, but the court disagreed. The court observed that it may be "easier" for competing manufacturers to compete using Dentsply’s dealers, but the function of the antitrust laws is not to "ease the burden of competing with an established and focused rival."¹⁷ Finally, the court acknowledged that Dentsply and its dealers consider Dealer Criterion 6 to be an agreement between them, but stressed that the dealer is not contractually obligated to continue the arrangement and is "free" to discontinue the relationship at any time.¹⁸ Although the DOJ attempted to "make much" of the fact that no dealer terminated its arrangement with Dentsply, the court concluded that this resulted from the failure of Dentsply’s competitors to offer an "attractive alternative" to dealers and not from Dentsply’s market power.¹⁹ For the court, the "important point for purposes of this case is that a dealer could leave at any time if an attractive alternative became available."²⁰

The court, quoting the Third Circuit,²¹ held that because Dentsply did not violate Section 3 of the Clayton Act, it did not violate Section 2 of the Sherman Act either.²² The court nonetheless offered a detailed explanation of why, even absent its holding with respect to the Clayton Act, Dentsply did not violate Section 2.²³

The court acknowledged that monopoly power may be inferred from Dentsply’s predominant market share, but concluded that the DOJ nevertheless failed to prove that Dentsply had the power to exclude competitors or control prices.²⁴ The court set forth various factors that it maintained demonstrate Dentsply’s inability to exclude competitors. First, although Dentsply intended Dealer Criterion 6 to exclude competitors from dealers, it does not exclude competitors from dental laboratories—the consumers— because direct distribution to dental laboratories is a "viable and, in some ways, advantageous method of distribution."²⁵ Second, Dentsply’s two main competitors failed to gain market share because of their own business decisions, not because of Dentsply’s exclusionary behavior.²⁶ Third, two new competitors entered the market and a pre-existing competitor expanded its product line during the relevant period.²⁷ Finally, the DOJ failed to prove that Dentsply’s exclusive dealing agreements with dealers present a barrier to market entry; even though it would be easier for a new entrant to enter the market by distributing its teeth through Dentsply dealers, competition can nevertheless "thrive" if competitors distribute their teeth directly to dental laboratories or through partnerships with other dealers, or "steal" dealers from Dentsply by offering a better product at a lower price.²⁸ The court also concluded that the DOJ failed to establish that Dentsply controls prices, citing as proof that (1) Dentsply teeth are priced between the teeth of its two main competitors, and the DOJ provided no evidence that Dentsply established supra-competitive pricing in the market; (2) although Dentsply’s profit margin was high, it was not shown to be high relative to the profit margins of its competitors, and high margins are expected in markets in which "significant pre-sale promotion is employed"; and (3) Dentsply’s "lack of urgency" to react to changes in the market resulted from "a lack of competition pushing Dentsply to compete[,]" and does not evidence control over prices or exclusion of competitors.²⁹

The court further determined, employing a rule of reason approach,³⁰ that the "circumstances" in the market "require a finding" that Dealer Criterion 6 does not unreasonably restrain competition.³¹ The court reasoned that Dealer Criterion 6 has had no anticompetitive effect. Although the court found that Dentsply’s intent was anticompetitive, it cited the DOJ’s admission that "‘bad’ intent alone [does] not establish that conduct is anticompetitive where the con-duct appears objectively incapable of harming competition[.]"³² The court again pointed to the viability of direct distribution, the availability of non-Dentsply dealers, and the fact that Dentsply dealers can be "converted at any time" as evidence of the DOJ’s failure to prove that Dentsply’s actions were or "could be successful in preventing ‘new or potential competitors from gaining a foothold in the market[.]’"³³

Even though the court found no anticompetitive effect, it devoted a significant portion of its opinion to the examination and, ultimately, rejection of Dentsply’s proffered pro-competitive justifications for Dealer Criterion 6. Dentsply claimed that Dealer Criterion 6 was established to focus dealers on selling Dentsply teeth and to protect its investment in the promotion of artificial teeth from free-riding, but the court deemed those justifications pretextual.³⁴ According to the court, Dentsply’s "pre-litigation rationale" for Dealer Criterion 6 was "expressly to exclude competitors from dealers"—not to "focus dealers or protect Dentsply’s investment in promoting artificial teeth."³⁵ The court implicitly based its conclusion on its earlier-stated factual findings that (i) a Dentsply document containing a "’reiteration’" of Dealer Criterion 6 included such statements as "Block competitive distribution points." and "Tie-up dealers"³⁶ and (ii) a former Dentsply Director of Sales and Marketing claimed that the policy’s sole purpose was to exclude Dentsply’s competitors from dental dealers.³⁷ The court also pointed out that this "litigation inspired justification" was contradicted by other evidence, including the admission by Dentsply’s own expert that an exclusive dealing agreement with dealers is not necessary to "protect pro-motion with dentists and consumers" and evidence that Dentsply enforced Dealer Criterion 6 against a dealer that carried only Dentsply merchandise and not Dentsply teeth.³⁸

This case highlights the importance of market definition in analyzing exclusive dealing agreements. Significantly, the court defined the relevant product market as the "sale," rather than the "distribution," of prefabricated artificial teeth in the United States. By focusing on the dental laboratories

as the consumers instead of the dealers, the court was able to conclude that Dealer Criterion 6 did not foreclose a substantial portion of the relevant market, which included direct sales to the dental laboratories. This case also helps define the parameters within which a monopolist can enter into exclusive dealing agreements without violating the antitrust laws. In United States v. Microsoft Corp.,³⁹ and more recently in LePage’s Inc. v. 3M,⁴⁰ contracts actually or effectively requiring exclusivity were held to violate Section 2 of the Sherman Act. In this case, the court held in essence that Dentsply’s exclusive agreements (despite lacking procompetitive justification and evidencing subjective anticompetitive intent) did not run afoul of the antitrust laws because the agreements produced no anticompetitive effects and Dentsply lacks market power. More intriguing, and possibly troubling, are the implications of the court’s rejection of certain routinely offered procompetitive justifications. In future exclusive-dealing cases where anticompetitive effects are present (e.g., a viable alternative method of distribution is lacking), Dentsply might suggest nearly automatic condemnation under the rule of reason, at least if there is evidence suggesting an exclusionary motive. This demonstrates the importance to firms of documenting their procompetitive reasons for entering into exclusive arrangements. It also demonstrates the importance of ensuring that their employees do not misunderstand why the firms engage in exclusive dealing, lest the misunderstanding manifest itself later as evidence that exclusive agreements are motivated by anticompetitive, not procompetitive, intent.

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