United States: 11th Circuit Affirms FTC Ruling That Exclusive Dealing Arrangements Violated Section 5 Of The FTC Act

On Apr. 15, 2015, the 11th Circuit affirmed a Federal Trade Commission ruling that McWane, Inc., the dominant producer of domestic pipe fittings, violated Section 5 of the FTC Act when it informed its distributors that unless they bought all of their domestic fittings from McWane, they would lose rebates and be cut off from purchases for 12 weeks. McWane, Inc. v. FTC, No. 14-11363 (11th Cir. Apr. 15, 2015).

McWane is the dominant producer of domestic pipe fittings in the United States. Pipe fittings, which join pipes and direct the flow of water, are sold primarily to municipal water authorities and their contractors. A water authority issues a specification for its project, and competing contractors solicit bids from distributors, who in turn seek quotes from manufacturers like McWane. The specification may be an "open specification," permitting the use of fittings manufactured anywhere in the world, or a "domestic specification," requiring the use of fittings made only in the United States. Most specifications are open, and most fittings are imported.

The overall market for fittings is an oligopoly of three suppliers: McWane, Star Pipe Products and another supplier. Until late 2009, McWane was the only supplier of domestic pipe fittings.  In 2009, Star entered the market for domestic pipe fittings, contracting with other foundries to manufacture pipe fittings for it. In response, McWane implemented a "Full Support Program," informing distributors that if they did not buy exclusively from McWane they could be cut off for 12 weeks and lose unpaid rebates. Internal documents demonstrated that the express purpose was to raise Star's costs and impede it from becoming a viable competitor.

The evidence demonstrated that some distributors abided by the program to avoid the repercussions of not doing so. Star was able to enter the market and grew from zero market share to 10% in 2011, but did not reach a sales level that justified building or buying its own foundry. Also, even following Star's entry into the market, the Full Support Program enabled McWane to raise prices and increased its gross profits. The Commission also found that the Full Support Program was a reason another distributor did not enter the market.

The 11th Circuit affirmed the Commission's decision that McWane's Full Support Program amounted to an exclusionary distribution policy that maintained its monopoly power in the domestic fittings market in violation of Section 5 of the FTC Act, which prohibits "[u]nfair methods of competition in or affecting commerce."

The Commission had applied a rule of reason analysis, finding that McWane enjoyed monopoly power in the U.S. market "for the supply of domestically-manufactured fittings for use in . . . projects with domestic-only specifications," and that there were substantial barriers to entry (despite the fact that Star was able to enter the market). The Commission also found that McWane engaged in the willful maintenance of monopoly power through its exclusive dealing policy that harmed competition by foreclosing Star's access to distributors and contributed to Star's lost sales. The Commission rejected McWane's arguments (1) that its program was presumptively legal because it was non-binding and short-term (in light of "market realities" rather than "formalistic distinctions"); (2) that the government failed to carry its burden of demonstrating harm to competition (there was substantial foreclosure and harm to competition); and (3) that the Commission wrongly rejected its pro-competitive justifications (internal documents were evidence that the pro-competitive justifications were "merely pretextual"). For these reasons, the 11th Circuit affirmed the Commission's decision that McWane's Full Support Program violated Section 5.

It is well known that exclusive dealing arrangements are subject to the rule of reason, and that for companies without market power they generally do not raise antitrust concerns. Even in the case of dominant firms, exclusive dealing arrangements often can be structured to avoid antitrust concerns, particularly by making them non-binding and of short duration. But, as McWane demonstrates, in some circumstances an exclusive dealing arrangement that is of short duration and which provides a termination right may trigger antitrust concerns.

The 11th Circuit's decision is available here.

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