On December 23, in a strongly worded opinion, United States District Judge, Kenneth M. Hoyt of the Southern District of Texas (Houston Division), granted defendant's motion for summary judgment and dismissed plaintiffs' antitrust case (El Aguila Food Products Inc. v. Grama Corp., S.D. Tex., No. H-03-0427, 12/24/03). Plaintiffs’ case challenged the payment by the nation's largest tortilla manufacturer, Grama Corp., of slotting allowances to retailers in return for favorable shelf space. Brought by several small tortilla manufacturers, the antitrust case attacked the propriety of defendant's shelf space and slotting allowances in a market for the sale of tortillas in retail supermarket chains in northern and southern California, Arizona, Texas and Michigan.
Plaintiffs are numerous small regional tortilla manufacturers operating in the relevant geographic markets. They alleged in the complaint that Grama's shelf space arrangements, including slotting payments with retailers (i.e., customer marketing agreements or CMA Agreements) were illegal under Sections 1 and 2 of the Sherman Act by using exclusionary conduct for the purpose of monopolizing or attempting to monopolize the retail sale of tortillas. The exclusionary conduct, in particular, resulted from the CMA Agreements with retail supermarkets.
Under the CMA Agreements, Grama paid as an incentive an "up-front" payment or "slotting fee" to the retailer to manage and control retail placement of all tortilla products on the retailers’ shelves. According to the complaint, these financial payments allowed Grama to control the placement, location, availability, visibility, and promotional activity of all retail tortilla products - - its own as well as competing products. The plaintiffs also alleged a Section 2(a) claim under the Robinson-Patman ("RP") Act. In the complaint, Grama was accused of engaging in discriminating practices "either by paying something of value to retailers or by requiring the plaintiffs to purchase corn flour at different prices in different states."
With respect to the Sherman Act Section 1 claim, the court found that defendant's agreements with retailers actually intensified competition in the industry, which led to new product introductions and increased shelf space for tortillas. The court also found that the evidence produced at trial showed that many retailers carried the plaintiffs' products and that prices were set by the retailers. Finally, the court found that many plaintiffs who actually lost shelfspace did so because they chose not to compete, rather than through any anticompetitive exclusionary conduct by defendant.
With respect to the Sherman Act Section 2 claim, the court found no evidence that Grama used slotting fees to create, maintain or attempt to create a monopoly. Grama's significant market share, the court noted, was due to its size and ability, and there was no evidence that Grama had market power over price or output. Similarly, with respect to its RP Section 2(a) claim, the court found no evidence that price variances from city to city or state to state were the result of Grama's predatory activity.
What was most interesting in this case was not the granting of Grama's motion for summary judgment, but that Judge Hoyt struck all the expert evidence offered by plaintiffs. The testimony of both plaintiffs’ expert witnesses, marketing expert Gregory T. Gundlach and damages expert Kenneth G. McCain, was labeled by the court as unreliable and based on unsupported assumptions.
Dr. Gundlach offered his expert opinion on behalf of the plaintiffs that slotting fees inherently resulted in exclusivity and permitted greater shelf facings than sales would otherwise dictate. He also testified that preferential space and display positions restricted competitive promotions and reduced competition. Dr. Gundlach formed his opinion exclusively on the recent FTC study, "Slotting Allowances in the Retail Grocery Industry - Study 2003." He did not interview a single retailer. The court found that many plaintiffs never had shelf space in the retailers' stores and never tried to obtain shelf space. Any loss of sales suffered by the plaintiffs, the court found, was not caused by Grama's CMA Agreements with retailers, as alleged by plaintiffs, but rather by their refusal to negotiate with retailers for increased shelf space. As a result of Dr. Gundlach's limited inquiry, the court found that his testimony did not establish antitrust injury and did not link injury to the challenged conduct. Since Dr. McCain's damages calculations assumed that Dr. Gundlach's testimony established causation between the challenged conduct and antitrust injury, the court ruled Dr. McCain's expert opinion inadmissible hearsay based on unsupported assumptions.
The developed record in this case suggests that this was a poor case to test the legal viability of a shelf space theory of antitrust harm. The contours of a tortilla product market were blurred and not clearly defined, because it appeared that many alternatives to fresh tortillas seemed to exist -- including tortilla shells, chips and refrigerated and frozen tortillas. Entry appeared to be easy with expansion by fringe firms possible and even likely. Prices, for whatever reason, appeared to be falling over time, an inherently bad fact in almost all antitrust cases. Even the role of slotting fees in the industry was ambiguous, given the conflicting testimony of plaintiffs' experts and sworn statements provided by defendant's retailer witnesses.
Finally, antitrust injury and plaintiffs' damages were weak and not tied to defendant's conduct or to a specific antitrust violation.
While the plaintiffs in the case were unsuccessful, retailers and manufacturers must still continue to seek counsel regarding slotting arrangements as the government and private parties will continue to challenge slotting allowances that foreclose rivals’ ability to compete.
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