United States: Third Circuit Imposes Daunting Standard To Prove Oligopolistic Price Fixing Via Circumstantial Evidence, But Manufacturers Must Still Tread Careful When Setting Their Prices

A recent Third Circuit1 federal appeals court decision, if it stands,2 likely means plaintiffs will avoid that circuit in the future when filing antitrust price-fixing actions based on parallel price increase announcements or other "circumstantial evidence" of collusion in an oligopolistic market. However, since the federal circuits do not act in lockstep when assessing the antitrust legality of price announcements, plaintiffs may still find jurisdictions receptive to allegations that announcements and other circumstantial evidence suffice to prove collusion. Moreover, the Third Circuit's decision reinforces that in non-oligopolistic markets the use of parallel pricing announcements by suppliers can support a price-fixing claim. Thus, while manufacturers can take comfort in the Third Circuit's decision as it applies to oligopolistic market conduct litigated in the Third Circuit,3 they need to remain vigilant in monitoring the antitrust risks that can emerge from their use of price increase announcements and other acts that can be considered circumstantial proof of antitrust wrongdoing.

Unlike conspiracy cases in which plaintiffs can show "direct evidence" that suppliers unambiguously agreed to fix prices (such as through group meetings and phone calls), price announcements involve murkier, ambiguous, or circumstantial evidence of agreement.4 In those instances, courts must decide what reasonable inferences of conspiracy can be drawn from the evidence.5 The Third Circuit's most recent decision on the subject, Valspar v. DuPont, makes clear that the answer depends on the amount of competition in the market. Oligopolistic markets are treated quite differently than non-oligopolistic markets.6

An oligopoly generally exists when a "handful of relatively large sellers control the bulk of a product's output."7 In an oligopolistic market, pricing and output decisions among suppliers arise from "conscious parallelism." Economic theory underlying conscious parallelism or interdependence8 posits that oligopolists tend to follow one another's price increases or output decisions without the need for supplier coordination.9 The Supreme Court has said that pricing and output decisions consistent with conscious parallelism are not, standing alone, unlawful.10 Similarly, a 2004 workshop involving the United States' antitrust watchdogs, the Department of Justice and the Federal Trade Commission, resulted in the following comment: "The Sherman Act does not prohibit concentration in the form of oligopoly so long as it is the product of coordination, absent agreement. Interdependent, yet individual, decisions made on the basis of the observed and expected price and output decisions by rivals are not actionable under the Sherman Act."11 This line of thinking is reflected in the Third Circuit's Valspar decision.

There, Valspar Corp. ("Valspar") alleged E.I. du Pont de Nemours & Co. ("DuPont") conspired with its market rivals to fix the price of titanium dioxide. To substantiate its claim, Valspar primarily relied on 31 parallel price increase announcements made by DuPont and its competitors. DuPont responded that its pricing behavior was a natural product of participating in an oligopolistic market. At summary judgment, the Delaware district court sided with DuPont, finding Valspar needed to but did not produce evidence of an actual agreement among DuPont and its market rivals.12 On appeal, the Third Circuit stated its legal standard for assessing Valspar's evidence of conspiracy.

In the absence of direct evidence of conspiracy, a Third Circuit plaintiff must provide inferences showing the conspiracy is more likely than not. The inferences that can be drawn from parallel pricing behavior in an oligopolistic market are materially different from those that can be drawn in a non-oligopolistic market. In a non-oligopolistic market, parallel behavior is the "sine qua non of a price fixing conspiracy."13 In an oligopolistic market, parallel behavior is simply a "fact of life" and insufficient to infer conspiracy. If dealing with an oligopoly, a plaintiff cannot rely on parallel conduct to establish the requisite inference. Instead, it must turn to "plus factors." Yet, the characteristics intrinsic to oligopolies render only one plus factor of value in the Third Circuit to a plaintiff in an oligopoly case: "evidence implying a traditional (i.e., explicit) conspiracy."14 Evidence of a tacit agreement15 is insufficient and a plaintiff must provide proof that defendants "got together and exchanged assurances of common action" or otherwise agreed to an "actual, manifest agreement not to compete."16

This is a massively difficult standard to meet. Indeed, the dissenting judge in the case wrote that the "ruling creates an unworkable burden ... for plaintiffs seeking to prove a Sherman Act price fixing case with circumstantial evidence."17 Not surprisingly, Valspar, despite presenting various categories of circumstantial evidence beyond that pertaining to the 31 price increases, could not meet its burden.18

The Valspar holding bodes well for manufacturers in oligopolistic markets who employ price announcements to inform customers of anticipated price increases. That said, manufacturers and suppliers must not lose sight of the fact that the Third Circuit's decision does not create unbounded protections. First, the Third Circuit noted other federal circuits have "no obligation to consider Third Circuit precedent," and pointed to a district court in the Fourth Circuit that applied a "standard quite different from the one we have developed" in assessing the record in the very class action from which Valspar had opted out.19 Thus, a sage plaintiff's lawyer, assuming its client(s) can meet the jurisdictional and venue requirements in more favorable jurisdictions, can still pursue suppliers in oligopolistic markets even when the action is predicated on circumstantial evidence of violation. Second, the Third Circuit remained true to the view that, in a non-oligopolistic market, parallel price announcements by competitors are an essential characteristic (i.e., the sine qua non) of a price-fixing agreement.20

Consequently, manufacturers – when reviewing, updating, or modifying their go to market strategy, including the use of price announcements – should consult with their competition counsel to (A) confirm the competitive structure of the market in which they operate from an antitrust perspective, (B) identify those federal (and state) jurisdictions in which they may be susceptible to antitrust suit for their sales practices, and (C) based on A and B, pinpoint potential antitrust risks their strategy may pose to their business and address accordingly.

Footnotes

1 Valspar Corp. v. E.I. du Pont de Nemours & Co., 2017 U.S. App. LEXIS 19015 (3d Cir. Sept. 14, 2017).

2 Valspar Corporation is seeking en banc Third Circuit review of the decision. If that fails, it would not be surprising to see the plaintiff request review by the Supreme Court.

3 The Third Circuit covers Delaware, New Jersey, and Pennsylvania.

4 Direct evidence in a Sherman Act, Section 1 conspiracy case is evidence "that is explicit and requires no inferences to establish the proposition or conclusion being asserted. . . . [W]ith direct evidence the fact finder is not required to make inferences to establish facts." Champagne Metals v. Ken-Mac Metals, Inc., 458 F.3d 1073, 1083 (10th Cir. 2006) (citation omitted). Circumstantial evidence requires inferences to arrive at factual conclusions. See generally Matsushita Electric Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986).

5 A plaintiff "must show that the inference of conspiracy is reasonable in light of the competing inferences of independent action." Matsushita, 475 U.S. at 588.

6 Separately, in the context of unilateral action as opposed to bilateral or multilateral action, a monopolist's conduct will attract scrutiny that others' conduct will not. See LePage's Inc. v. 3M, 324 F.3d 141, 151-52 (3d Cir. 2003) ("a monopolist is not free to take certain actions that a company in a competitive (or even oligopolistic) market may take, because there is no market constraint on a monopolist's behavior.").

7 Bailey v. Aligas, Inc., 284 F.3d 1237, 1245-46 (11th Cir. 2002) (citing IIA Phillip E. Areeda et al., Antitrust Law 404a (2d ed. 2002)).

8 The term "interdependence" generally is used interchangeably with conscious parallelism. See, Valspar, at *6; In re Titanium Dioxide Antitrust Litig. 959 F. Supp. 2d 799, 822 (D. Md. 2013); Bogosian v. Gulf Oil Corp., 561 F.2d 434, 459 (3d Cir. 1977) (Aldisert, J. dissenting) ("interdependence is implicit in the notion of conscious parallelism .... [A] businessman is conscious of what his competitor is doing and his action, or inaction, depends on what the competitor does.").

9 Valspar, at *2.

10 Bell Atl. Corp. v. Twombly, 550 U.S. 544, 553-54 (2007).

11 James R. Loftis, U.S. DOJ / U.S. FTC Merger Workshop, "Coordinated Effects" (Feb. 18, 2004) (available at https://www.justice.gov/atr/coordinated-effects#N_6_).

12 Valspar Corp. v. E.I. du Pont de Nemours & Co., 152 F. Supp. 3d 234 (D. Del. 2016).

13 Valspar, at *8-9.

14 Valspar, at *10 & n.3.

15 A tacit agreement arises when parties do not explicitly agree but, in so many words, are aware of what one another is doing and act in a manner from which one can infer they have reached agreement. See, e.g., United States v. Masonite Corp., 316 U.S. 265 (1942).

16 Valspar, at *10 & n.3.

17 Valspar, at *31 (Stengel, J., dissenting).

18 The further evidence included "internal emails showing an awareness of th[e] parallel price movement, competitor participation in a trade association and statistics sharing program, inter-firm sales at below market prices, and use of industry consultants." Valspar, at *26.

19 Valspar, at *4, *29-30.

20 Valspar, at *8.

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