United States: Supreme Court Decision Leaves Standing FTC Monopolization Challenge To Exclusive Dealing

A court's inaction is not always worth discussion. But in declining review of the Federal Trade Commission's successful challenge of a manufacturer's exclusive dealing requirement imposed on distributors, the Supreme Court has shown that vertical restraints remain risky, especially for a monopolist. The Supreme Court's denial of certiorari in McWane, Inc. v. FTC, 783 F.3d 814 (11th Cir. 2015), left standing the Eleventh Circuit's decision that had affirmed the FTC finding of liability.

The Supreme Court last addressed the law governing exclusive dealing 55 years ago in Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320 (1961), where it relied on a theory of substantial foreclosure and harm to competitors to analyze an exclusive dealing claim. Since then, antitrust jurisprudence dealing with vertical practices has evolved from an approach based on harm to competitors to an approach that focuses instead on harm to competition.

The Supreme Court declined the opportunity in McWane to revisit the law governing exclusive dealing arrangements and to clarify the quantum of direct and indirect evidence necessary to establish harm to competition from such arrangements. This means that businesses and their legal advisors must look to the court of appeals opinion and its efforts to reconcile evolving antitrust jurisprudence with Supreme Court precedent from a different era.

Background

McWane, Inc. is a manufacturer of iron pipe fittings, which are used to connect water pipes in municipal water supply systems. Today, three suppliers—McWane and importers Star Pipe Products Ltd. and Sigma Corporation—account for approximately 90% of the iron pipe fittings sold domestically, with McWane by far the largest supplier.

In 2009, Congress passed the American Recovery and Reinvestment Act, which allocated $6 billion to waterworks projects, but required that the projects use domestically manufactured fittings. At the time, McWane was the only significant manufacturer of domestically-produced fittings. In response to this legislation, Star began contracting with U.S. foundries to manufacture domestic pipe fittings and sell them to U.S. distributors.

McWane in turn implemented its "Full Support Program," which provided that distributors purchasing domestic fittings from McWane's competitors could lose rebates or be cut off from purchasing McWane's domestic fittings for up to three months. McWane's internal document revealed its express purpose in implementing the policy was to raise Star's costs and prevent it from becoming a viable competitor. The policy was effective: the two largest waterworks distributors prohibited their U.S. branches from purchasing domestic fittings from Star. Nevertheless, Star grew its U.S. market share from 5% in 2010 to 10% in 2011, and it was on pace for its best year ever in 2012.

Divided FTC Finds Monopolization

In January 2012, the FTC issued an administrative complaint alleging that McWane's exclusivity mandate constituted unlawful maintenance of a monopoly over the domestically-produced fittings market. In January 2014, a divided Commission ruled that McWane had engaged in unlawful exclusive dealing, which had foreclosed Star's access to U.S. distributors for its domestically-produced fittings and thereby harmed competition. The FTC ordered McWane to cease requiring distributor exclusivity.

Then-Commissioner Joshua Wright dissented. Commissioner Wright emphasized that vertical restraints such as exclusive dealing generally tend to benefit consumers and thus they should be prohibited only in those rare circumstances where there is clear evidence of harm to competition. Although he assumed that McWane was a monopolist in the domestically-produced fittings market, he argued that the exclusive dealing had only harmed Star, but had not resulted in cognizable harm to competition. Commissioner Wright noted that the FTC did not have any direct evidence to show that McWane's policy had increased prices or reduced output in domestically-produced fittings. While McWane did increase its prices after the Full Support Program, evidence indicated Star's presence in various states from 2009 to 2011 did not result in lower prices for domestically-produced fittings, suggesting the exclusion of Star was competitively inconsequential.

Eleventh Circuit Upheld FTC

On appeal from the FTC, the Eleventh Circuit ruled that "substantial evidence" supported the FTC's finding that McWane's exclusive dealing harmed the competitive process and allowed it illegally to maintain its monopoly.

The Eleventh Circuit reasoned that "courts are bound by Tampa Electric's requirement to consider substantial foreclosure" in a rule of reason analysis. While the FTC did not quantify a foreclosure rate, the court was persuaded by the evidence that the two largest distributors, who together controlled approximately 60% of U.S. distribution, prohibited their branches from purchasing from Star. The court rejected McWane's argument that the exclusive dealing arrangement was presumptively legal because it was voluntary, non-binding and short-term.

Further, the Eleventh Circuit found that McWane's exclusive dealing arrangement harmed competition. The court was persuaded by evidence that prices and profit margins for domestic fittings were notably higher than prices for imported fittings, which faced greater competition. McWane argued that the lack of price effects in states where Star entered demonstrated the absence of competitive harm, but the court found this evidence "consistent with a reasonable inference that the Full Support Program significantly contributed to maintaining McWane's monopoly power."

Finally, the Eleventh Circuit held that the clear anticompetitive intent behind the Full Support Program supported the inference that it harmed competition. The court was not persuaded by McWane's asserted procompetitive reasons for the exclusive dealing arrangement (that the Full Support Program was necessary to retain enough sales to keep its domestic foundry afloat and to keep Star from cherrypicking the top few fittings that account for the majority of sales).

McWane petitioned for review by the Supreme Court. McWane's certiorari petition received support from several amici briefs, including from a group of antitrust law professors who argued that "antitrust law should not penalize vertical agreements unless they are shown to harm competition" and expressed concern that the Eleventh Circuit decision could chill beneficial competition and have adverse effects for consumer welfare. Despite this support, the Supreme Court declined to grant certiorari.

Implications

The tension between the precedent established by the Eleventh Circuit in McWane and Commissioner Wright's position centers on the evidence needed to establish that an exclusive dealing arrangement is likely to harm competition. Commissioner Wright argued that there must be direct evidence establishing a negative impact on price or output to link the harm to a competitor with harm to competition more generally, a link that he found lacking in this case. The Eleventh Circuit disagreed, finding that the government met its burden by providing substantial evidence that McWane "engaged in anticompetitive conduct that reasonably appears to significantly contribute to maintaining monopoly power." The Eleventh Circuit found direct evidentiary support from McWane's ability to raise its own prices. The Eleventh Circuit rejected McWane's argument that the government did not adequately prove that the Full Support Program was responsible for McWane's decision to raise prices, a position echoed in Commissioner Wright's dissent, because it "demands too high a bar for causation." This deferential approach provides the FTC and private litigants with greater latitude in challenging exclusive dealing arrangements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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J. Bruce McDonald
 
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