United States v. Dentsply Intl Inc ( 2005 )

Opinions of the United
2005 Decisions States Court of Appeals
for the Third Circuit
2-24-2005
USA v. Dentsply Intl Inc
Precedential or Non-Precedential: Precedential
Docket No. 03-4097
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PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 03-4097
UNITED STATES OF AMERICA,
Appellant
v.
DENTSPLY INTERNATIONAL, INC.,
____________
APPEAL FROM THE UNITED STATES DISTRICT
COURT FOR THE DISTRICT OF DELAWARE
(D.C. Civ. No. 99-00005)
District Judge: Honorable Sue L. Robinson, Chief Judge
____________
Argued September 21, 2004
Before: McKEE, ROSENN and WEIS, Circuit Judges.
(Filed February 24, 2005)
____________
R. Hewitt Pate, Esquire
Assistant Attorney General
Makan Delrahim, Esquire
J. Bruce M cDonald, Esquire
Deputy Assistant Attorneys General
Adam D. Hirsh, Esquire (ARGUED)
Robert B. Nicholson, Esquire
Mark J. Botti, Esquire
Jon B. Jacobs, Esquire
Attorneys
U.S. Department of Justice
Antitrust Division
601 D Street NW, Room 10535
Washington, DC 20530-0001
Attorneys for Appellant United States of America
Margaret M. Zwisler, Esquire (ARGUED)
Richard A. Ripley, Esquire
Kelly A. Clement, Esquire
Eric J. McCarthy, Esquire
Douglas S. Morrin, Esquire
Howrey Simon Arnold & White, LLP
1299 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
William D. Johnston, Esquire
Christian D. Wright, Esquire
Young, Conaway, Stargatt & Taylor
1000 West Street
17 th Floor Brandywine Building
Wilmington, Delaware 19801
2
Of Counsel:
Brian M. Addison, Esquire
Dentsply International, Inc.
Susquehanna Commerce Center
221 West Philadelphia Street
York, Pennsylvania 17405
Attorneys for Appellee Dentsply International, Inc.
____________
OPINION
____________
WEIS, Circuit Judge.
In this antitrust case we conclude that an exclusivity
policy imposed by a manufacturer on its dealers violates Section
2 of the Sherman Act. We come to that position because of the
nature of the relevant market and the established effectiveness
of the restraint despite the lack of long term contracts between
the manufacturer and its dealers. Accordingly, we will reverse
the judgment of the District Court in favor of the defendant and
remand with directions to grant the Government’s request for
injunctive relief.
The Government alleged that Defendant, Dentsply
International, Inc., acted unlawfully to maintain a monopoly in
violation of Section 2 of the Sherman Act, 15 U.S.C. § 2;
entered into illegal restrictive dealing agreements prohibited by
Section 3 of the Clayton Act, 15 U.S.C. § 14; and used unlawful
3
agreements in restraint of interstate trade in violation of Section
1 of the Sherman Act, 15 U.S.C. § 1. After a bench trial, the
District Court denied the injunctive relief sought by the
Government and entered judgment for defendant.
In its comprehensive opinion, the District Court found the
following facts. Dentsply International, Inc. is a Delaware
Corporation with its principal place of business in York
Pennsylvania. It manufactures artificial teeth for use in dentures
and other restorative appliances and sells them to dental
products dealers. The dealers, in turn, supply the teeth and
various other materials to dental laboratories, which fabricate
dentures for sale to dentists.
The relevant market is the sale of prefabricated artificial
teeth in the United States.
Because of advances in dental medicine, artificial tooth
manufacturing is marked by a low or no-growth potential.
Dentsply has long dominated the industry consisting of 12-13
manufacturers and enjoys a 75% - 80% market share on a
revenue basis, 67% on a unit basis, and is about 15 times larger
than its next closest competitor. The other significant
manufacturers and their market shares are:
4
Ivoclar Vivadent, Inc. 5%
Vita Zahnfabrik 3%
*Myerson LLC 3%
*American Tooth Industries 2%
*Universal Dental Company 1% - 2%
Heraeus Kulzer GmbH 1%
Davis, Schottlander & Davis, Ltd. <1%
* These companies sell directly to dental laboratories as well
as to dealers.
Dealers sell to dental laboratories a full range of metals,
porcelains, acrylics, waxes, and other materials required to
fabricate fixed or removal restorations. Dealers maintain large
inventories of artificial teeth and carry thousands of products,
other than teeth, made by hundreds of different manufacturers.
Dentsply supplies $400 million of products other than teeth to
its network of 23 dealers.
There are hundreds of dealers who compete on the basis
of price and service among themselves, as well as with
manufacturers who sell directly to laboratories. The dealer field
has experienced significant consolidation with several large
national and regional firms emerging.
For more than fifteen years, Dentsply has operated under
a policy that discouraged its dealers from adding competitors’
teeth to their lines of products. In 1993, Dentsply adopted
5
“Dealer Criterion 6.” It provides that in order to effectively
promote Dentsply-York products, authorized dealers “may not
add further tooth lines to their product offering.” Dentsply
operates on a purchase order basis with its distributors and,
therefore, the relationship is essentially terminable at will.
Dealer Criterion 6 was enforced against dealers with the
exception of those who had carried competing products before
1993 and were “grandfathered” for sales of those products.
Dentsply rebuffed attempts by those particular distributors to
expand their lines of competing products beyond the
grandfathered ones.
Dentsply’s five top dealers sell competing grandfathered
brands of teeth. In 2001, their share of Dentsply’s overall sales
were
Zahn 39%
Patterson 28%
Darby 8%
Benco 4%
DLDS <4%
TOTAL .... 83%
16,000 dental laboratories fabricate restorations and a
subset of 7,000 provide dentures. The laboratories compete with
each other on the basis of price and service. Patients and
dentists value fast service, particularly in the case of lost or
damaged dentures. When laboratories’ inventories cannot
6
supply the necessary teeth, dealers may fill orders for walk-ins
or use over-night express mail as does Dentsply, which dropped-
shipped some 60% of orders from dealers.
Dealers have been dissatisfied with Dealer Criterion 6,
but, at least in the recent past, none of them have given up the
popular Dentsply teeth to take on a competitive line. Dentsply
at one time considered selling directly to the laboratories, but
abandoned the concept because of fear that dealers would
retaliate by refusing to buy its other dental products.
In the 1990's Dentsply implemented aggressive sales
campaigns, including efforts to promote its teeth in dental
schools, providing rebates for laboratories’ increased usage, and
deploying a sales force dedicated to teeth, rather than the entire
product mix. Its chief competitors did not as actively promote
their products. Foreign manufacturers were slow to alter their
designs to cope with American preferences, and, in at least one
instance, pursued sales of porcelain products rather than plastic
teeth.
Dentsply has had a reputation for aggressive price
increases in the market and has created a high price umbrella.
Its artificial tooth business is characterized as a “cash cow”
whose profits are diverted to other operations of the company.
A report in 1996 stated its profits from teeth since 1990 had
increased 32% from $16.8 million to $22.2 million.
The District Court found that Dentsply’s business
justification for Dealer Criterion 6 was pretextual and designed
expressly to exclude its rivals from access to dealers. The Court
7
however concluded that other dealers were available and direct
sales to laboratories was a viable method of doing business.
Moreover, it concluded that Dentsply had not created a market
with supra competitive pricing, dealers were free to leave the
network at any time, and the Government failed to prove that
Dentsply’s actions “have been or could be successful in
preventing ‘new or potential competitors from gaining a
foothold in the market.’” United States v. Dentsply Int’l, Inc.,
277 F. Supp. 2d 387, 453 (D. Del. 2003) (quoting LePage’s, Inc.
v. 3M, 324 F.3d 141, 159 (3d Cir. 2003)). Accordingly, the
Court concluded that the Government had failed to establish
violations of Section 3 of the Clayton Act and Sections 1 or 2 of
the Sherman Act.
The Government appealed, contending that a monopolist
that prevents rivals from distributing through established dealers
has maintained its monopoly by acting with predatory intent and
violates Section 2. Additionally, the Government asserts that
the maintenance of a 75% - 80% market share, establishment of
a price umbrella, repeated aggressive price increases and
exclusion of competitors from a major source of distribution,
show that Dentsply possesses monopoly power, despite the fact
that rivals are not entirely excluded from the market and some
of their prices are higher. The Government did not appeal the
rulings under Section 1 of the Sherman Act or Section 3 of the
Clayton Act.
Dentsply argues that rivals had obtained a share of the
relevant market, that there are no artificially high prices and that
competitors have access to all laboratories through existing or
readily convertible systems. In addition, Dentsply asserts that its
8
success is due to its leadership in promotion and marketing and
not the imposition of Dealer Criterion 6.
I. STANDARD OF REVIEW
We exercise de novo review over the District Court’s
conclusions of law. See Allen-Myland, Inc. v. IBM Corp., 33
F.3d 194, 201 (3d Cir. 1994). See also United States v.
Microsoft, 253 F.3d 34, 50 (D.C. Cir. 2001). However, we will
not disturb its findings of fact unless they are clearly erroneous.
See Smith-Kline Corp. v. Eli Lilly and Co., 575 F.2d 1056, 1062
(3d Cir. 1978).
II. APPLICABLE LEGAL PRINCIPLES
Section 2 of the Sherman Act, 15 U.S.C. § 2, provides
that “[e]very person who shall monopolize, or attempt to
monopolize, or combine or conspire with any other person . . .
to monopolize any part of the trade” is guilty of an offense and
subject to penalties. In addition, the Government may seek
injunctive relief. 15 U.S.C. § 4.
A violation of Section 2 consists of two elements:
(1) possession of monopoly power and (2) “. . . maintenance of
that power as distinguished from growth or development as a
consequence of a superior product, business acumen, or historic
accident.” Eastman Kodak Co. v Image Technical Servs., Inc.,
504 U.S. 451, 480 (1992) (citing United States v. Grinnell
Corp., 384 U.S. 563, 571 (1966)). “Monopoly power under § 2
requires . . . something greater than market power under § 1.”
Eastman Kodak Co., 504 U.S. at 481.
9
To run afoul of Section 2, a defendant must be guilty of
illegal conduct “to foreclose competition, gain a competitive
advantage, or to destroy a competitor.” Id. at 482-83 (quoting
United States v. Griffith, 334 U.S. 100, 107 (1948)). See
generally Lorain Journal Co. v. United States, 342 U.S. 143
(1951). Behavior that otherwise might comply with antitrust
law may be impermissibly exclusionary when practiced by a
monopolist. As we said in 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.” 3 Areeda & Turner, Antitrust Law ¶
813, at 300-02 (1978).
Although not illegal in themselves, exclusive dealing
arrangements can be an improper means of maintaining a
monopoly. United States v. Grinnell Corp., 384 U.S. 563
(1966); LePage’s, 324 F.3d at 157. A prerequisite for such a
violation is a finding that monopoly power exists. See, e.g.,
LePage’s, 324 F.3d at 146. In addition, the exclusionary
conduct must have an anti-competitive effect. See id. at 152,
159-63. If those elements are established, the monopolist still
retains a defense of business justification. See id. at 152.
Unlawful maintenance of a monopoly is demonstrated by
proof that a defendant has engaged in anti-competitive conduct
that reasonably appears to be a significant contribution to
maintaining monopoly power. United States v. Microsoft, 253
F.3d 34, 79 (D.C . Cir. 2001); 3 Phillip E. Areeda & Herbert
Hovenkamp, Antitrust Law, ¶ 651c at 78 (1996). Predatory or
exclusionary practices in themselves are not sufficient. There
10
must be proof that competition, not merely competitors, has
been harmed. LePage’s, 324 F.3d at 162.
III. MONOPOLY POW ER
The concept of monopoly is distinct from monopoly
power, which has been defined as the ability “to control prices
or exclude competition.” Grinnell, 384 U.S. at 571; see also
United States v. E.I. du Pont de Nemours and Co., 351 U.S. 377
(1956). However, because such evidence is “only rarely
available, courts more typically examine market structure in
search of circumstantial evidence of monopoly power.”
Microsoft, 253 F.3d at 51. Thus, the existence of monopoly
power may be inferred from a predominant share of the market,
Grinnell, 384 U.S. at 571, and the size of that portion is a
primary factor in determining whether power exists.
Pennsylvania Dental Ass’n v. Med. Serv. Ass’n of Pa, 745 F.2d
248, 260 (3d Cir. 1984).
A less than predominant share of the market combined
with other relevant factors may suffice to demonstrate monopoly
power. Fineman v. Armstrong World Indus., 980 F.2d 171, 201
(3d Cir. 1992). Absent other pertinent factors, a share
significantly larger than 55% has been required to established
prima facie market power. Id. at 201. Other germane factors
include the size and strength of competing firms, freedom of
entry, pricing trends and practices in the industry, ability of
consumers to substitute comparable goods, and consumer
demand. See Tampa Elec. Co. v. Nashville Coal Co., 365 U.S.
320 (1961); Barr Labs. v. Abbott Labs., 978 F.2d 98 (3d Cir.
11
1992); Weiss v. York Hosp., 745 F.2d 786, 827 n.72 (3d Cir.
1984).
A. The Relevant Market
Defining the relevant market is an important part of the
analysis. The District Court found the market to be “the sale of
prefabricated artificial teeth in the United States.” United States
v. Dentsply Int’l Inc., 277 F. Supp 2d. 387, 396 (D. Del. 2003).
Further, the Court found that “[t]he manufacturers participating
in the United States artificial tooth market historically have
distributed their teeth into the market in one of three ways: (1)
directly to dental labs; (2) through dental dealers; or (3) through
a hybrid system combining manufacturer direct sales and dental
dealers.” Finding of Fact 13.1 The Court also found that the
“labs are the relevant consumers for prefabricated artificial
teeth.” FF61.
There is no dispute that the laboratories are the ultimate
consumers because they buy the teeth at the point in the process
where they are incorporated into another product. Dentsply
points out that its representatives concentrate their efforts at the
laboratories as well as at dental schools and dentists. See
Dentsply Int’l Inc., 277 F. Supp 2d. at 429-34.
During oral argument, Dentsply’s counsel said, “the
dealers are not the market...[t]he market is the dental labs that
1
The District Court’s Findings of Fact will be referred to as
“FF” hereafter.
12
consume the product.” Transcript of Oral Argument at 47.
Emphasizing the importance of end users, Dentsply argues that
the District Court understood the relevant market to be the sales
of artificial teeth to dental laboratories in the United States.
Although the Court used the word “market” in a number of
differing contexts, the findings demonstrate that the relevant
market is not as narrow as Dentsply would have it. In FF238,
the Court said that Dentsply “has had a persistently high market
share between 75% and 80% on a revenue basis, in the artificial
tooth market.” Dentsply sells only to dealers and the narrow
definition of market that it urges upon us would be completely
inconsistent with that finding of the District Court.
The Court went on to find that Ivoclar “has the second-
highest share of the market, at approximately 5%.” FF239.
Ivoclar sells directly to the laboratories. Therefore, these two
findings establish that the relevant market in this case includes
sales to dealers and direct sales to the laboratories. Other
findings on Dentsply’s “market share” are consistent with this
understanding. FF240-243.
These findings are persuasive that the District Court
understood, as do we, the relevant market to be the total sales of
artificial teeth to the laboratories and the dealers combined.
Dentsply’s apparent belief that a relevant market cannot
include sales both to the final consumer and a middleman is
refuted in the closely analogous case of Allen-Myland, Inc. v.
IBM Corp., 33 F.3d 194 (3d Cir. 1994). In that case, IBM sold
mainframe computers directly to the ultimate consumers and
also sold to companies that leased computers to ultimate users.
13
We concluded that the relevant market encompassed the sales
directly to consumers as well as those to leasing companies.
“...to the extent that leasing companies deal in used, non-IBM
mainframes that have not already been counted in the sales
market, these machines belong in the relevant market for large-
scale mainframe computers.” Id. at 203.
To resolve any doubt, therefore, we hold that the relevant
market here is the sale of artificial teeth in the United States
both to laboratories and to the dental dealers.
B. Power to Exclude
Dentsply’s share of the market is more than adequate to
establish a prima facie case of power. In addition, Dentsply has
held its dominant share for more than ten years and has fought
aggressively to maintain that imbalance. One court has
commented that, “[i]n evaluating monopoly power, it is not
market share that counts, but the ability to maintain market
share.” United States v. Syufy Enters., 903 F.2d 659, 665-66
(9 th Cir. 1990).
The District Court found that it could infer monopoly
power because of the predominant market share, but despite that
factor, concluded that Dentsply’s tactics did not preclude
competition from marketing their products directly to the dental
laboratories. “Dentsply does not have the power to exclude
competitors from the ultimate consumer.” United States v.
Dentsply Int’l, Inc., 277 F. Supp. 2d 387, 452 (D. Del. 2003).
14
Moreover, the Court determined that failure of
Dentsply’s two main rivals, Vident and Ivoclar, to obtain
significant market shares resulted from their own business
decisions to concentrate on other product lines, rather than
implement active sales efforts for teeth.
The District Court’s evaluation of Ivoclar and Vident
business practices as a cause of their failure to secure more of
the market is not persuasive. The reality is that over a period of
years, because of Dentsply’s domination of dealers, direct sales
have not been a practical alternative for most manufacturers. It
has not been so much the competitors’ less than enthusiastic
efforts at competition that produced paltry results, as it is the
blocking of access to the key dealers. This is the part of the real
market that is denied to the rivals.
The apparent lack of aggressiveness by competitors is not
a matter of apathy, but a reflection of the effectiveness of
Dentsply’s exclusionary policy. Although its rivals could
theoretically convince a dealer to buy their products and drop
Dentsply’s line, that has not occurred. In United States v. Visa
U.S.A., 344 F.3d at 229, 240 (2d Cir. 2003), the Court of
Appeals held that similar evidence indicated that defendants had
excluded their rivals from the marketplace and thus
demonstrated monopoly power.
The Supreme Court on more than one occasion has
emphasized that economic realities rather than a formalistic
approach must govern review of antitrust activity. “Legal
presumptions that rest on formalistic distinctions rather than
actual market realities are generally disfavored in antitrust law
15
. . . in determining the existence of market power . . . this Court
has examined closely the economic reality of the market at
issue.” Eastern Kodak Co. v. Image Technical Servs., Inc., 504
U.S. 457, 466-67 (1992). “If we look at substance rather than
form, there is little room for debate.” United States v. Sealy,
Inc., 388 U.S. 350, 352 (1967). We echoed that standard in
Weiss v. York Hosp., 745 F.2d 786, 815 (3d Cir. 1984).
“Antitrust policy requires the courts to seek the economic
substance of an arrangement, not merely its form.” Id.
The realities of the artificial tooth market were candidly
expressed by two former managerial employees of Dentsply
when they explained their rules of engagement. One testified
that Dealer Criterion 6 was designed to “block competitive
distribution points.” He continued, “Do not allow competition
to achieve toeholds in dealers; tie up dealers; do not ‘free up’
key players.”
Another former manager said:
You don’t want your competition with your
distributors, you don’t want to give the
distributors an opportunity to sell a competitive
product. And you don’t want to give your end
user, the customer, meaning a laboratory and/or a
dentist, a choice. He has to buy Dentsply teeth.
That’s the only thing that’s available. The only
place you can get it is through the distributor and
the only one that the distributor is selling is
Dentsply teeth. That’s your objective.
16
These are clear expressions of a plan to maintain monopolistic
power.
The District Court detailed some ten separate incidents in
which Dentsply required agreement by new as well as long-
standing dealers not to handle competitors’ teeth. For example,
when the DLDS firm considered adding two other tooth lines
because of customers’ demand, Dentsply threatened to sever
access not only to its teeth, but to other dental products as well.
DLDS yielded to that pressure. The termination of Trinity
Dental, which had previously sold Dentsply products other than
teeth, was a similar instance. When Trinity wanted to add teeth
to its line for the first time and chose a competitor, Dentsply
refused to supply other dental products.
Dentsply also pressured Atlanta Dental, Marcus Dental,
Thompson Dental, Patterson Dental and Pearson Dental Supply
when they carried or considered adding competitive lines. In
another incident, Dentsply recognized DTS as a dealer so as to
“fully eliminate the competitive threat that [DTS locations] pose
by representing Vita and Ivoclar in three of four regions.”
The evidence demonstrated conclusively that Dentsply
had supremacy over the dealer network and it was at that crucial
point in the distribution chain that monopoly power over the
market for artificial teeth was established. The reality in this
case is that the firm that ties up the key dealers rules the market.
In concluding that Dentsply lacked the power to exclude
competitors from the laboratories, “the ultimate consumers,” the
District Court overlooked the point that the relevant market was
17
the “sale” of artificial teeth to both dealers and laboratories.
Although some sales were made by manufacturers to the
laboratories, overwhelming numbers were made to dealers.
Thus, the Court’s scrutiny should have been applied not to the
“ultimate consumers” who used the teeth, but to the “customers”
who purchased the teeth, the relevant category which included
dealers as well as laboratories. This mis-focus led the District
Court into clear error.
The factual pattern here is quite similar to that in
LePage’s, Inc. v. 3M, 324 F.3d 141 (3d Cir. 2003). There, a
manufacturer of transparent tape locked up high volume
distribution channels by means of substantial discounts on a
range of its other products. LePage’s, 324 F.3d at 144, 160-62.
We concluded that the use of exclusive dealing and bundled
rebates to the detriment of the rival manufacturer violated
Section 2. See LePage’s, 324 F.3d at 159. Similarly, in
Microsoft, the Court of Appeals for the D. C. Circuit concluded
that, through the use of exclusive contracts with key dealers, a
manufacturer foreclosed competitors from a substantial
percentage of the available opportunities for product
distribution. See Microsoft, 253 F.3d at 70-71.
The evidence in this case demonstrates that for a
considerable time, through the use of Dealer Criterion 6
Dentsply has been able to exclude competitors from the dealers’
network, a narrow, but heavily traveled channel to the dental
laboratories.
18
C. Pricing
An increase in pricing is another factor used in evaluating
existence of market power. Although in this case the evidence
of exclusion is stronger than that of Dentsply’s control of prices,
testimony about suspect pricing is also found in this record.
The District Court found that Dentsply had a reputation
for aggressive price increases in the market. It is noteworthy
that experts for both parties testified that were Dealer Criterion
6 abolished, prices would fall. A former sales manager for
Dentsply agreed that the company’s share of the market would
diminish should Dealer Criterion 6 no longer be in effect. In
1993, Dentsply’s regional sales manager complained, “[w]e
need to moderate our increases – twice a year for the last few
years was not good.” Large scale distributors observed that
Dentsply’s policy created a high price umbrella.
Although Dentsply’s prices fall between those of Ivoclar
and Vita’s premium tooth lines, Dentsply did not reduce its
prices when competitors elected not to follow its increases.
Dentsply’s profit margins have been growing over the years.
The picture is one of a manufacturer that sets prices with little
concern for its competitors, “something a firm without a
monopoly would have been unable to do.” Microsoft, 253 F.3d
at 58. The results have been favorable to Dentsply, but of no
benefit to consumers.
Moreover, even “if monopoly power has been acquired
or maintained through improper means, the fact that the power
has not been used to extract [a monopoly price] provides no
19
succor to the monopolist.” Microsoft, 253 F.3d at 57 (quoting
Berkey Photo, Inc. v. Eastman Kodak, Co., 603 F.2d 263, 274
(2d Cir. 1979)). The record of long duration of the exclusionary
tactics and anecdotal evidence of their efficacy make it clear that
power existed and was used effectively. The District Court
erred in concluding that Dentsply lacked market power.
IV. ANTI-COMPETITIVE EFFECTS
Having demonstrated that Dentsply possessed market
power, the Government must also establish the second element
of a Section 2 claim, that the power was used “to foreclose
competition.” United States v. Griffith, 334 U.S. 100, 107
(1948). Assessing anti-competitive effect is important in
evaluating a challenge to a violation of Section 2. Under that
Section of the Sherman Act, it is not necessary that all
competition be removed from the market. The test is not total
foreclosure, but whether the challenged practices bar a
substantial number of rivals or severely restrict the market’s
ambit. LePage’s, 324 F.3d at 159-60; Microsoft, 253 F.3d at 69.
A leading treatise explains,
A set of strategically planned exclusive dealing
contracts may slow the rival’s expansion by
requiring it to develop alternative outlets for its
products or rely at least temporarily on inferior or
more expensive outlets. Consumer injury results
from the delay that the dominant firm imposes on
the smaller rival’s growth. Herbert Hovenkamp,
Antitrust Law ¶ 1802c, at 64 (2d ed. 2002).
20
By ensuring that the key dealers offer Dentsply teeth
either as the only or dominant choice, Dealer Criterion 6 has a
significant effect in preserving Dentsply's monopoly. It helps
keep sales of competing teeth below the critical level necessary
for any rival to pose a real threat to Dentsply's market share. As
such, Dealer Criterion 6 is a solid pillar of harm to competition.
See LePage's, 324 F.3d 141, 159 (3d Cir. 2001) ("When a
monopolist's actions are designed to prevent one or more new or
potential competitors from gaining a foothold in the market by
exclusionary, i.e. predatory, conduct, its success in that goal is
not only injurious to the potential competitor but also to
competition in general.").
A. Benefits of Dealers
Dentsply has always sold its teeth through dealers. Vita
sells through Vident, its exclusive distributor and domestic
affiliate, but has a mere 3% of the market. Ivoclar had some
relationship with dealers in the past, but its direct relationship
with laboratories yields only a 5% share.
A number of factors are at work here. For a great number
of dental laboratories, the dealer is the preferred source for
artificial teeth. Although the District Court observed that “labs
prefer to buy direct because of potential cost savings attributable
to the elimination of the dealer middleman[,]” FF81, in fact,
laboratories are driven by the realities of the marketplace to buy
far more heavily from dealers than manufacturers. This may be
largely attributed to the beneficial services, credit function,
economies of scale and convenience that dealers provide to
21
laboratories, benefits which are otherwise unavailable to them
when they buy direct. FF71, 81, 84.
The record is replete with evidence of benefits provided
by dealers. For example, they provide laboratories the benefit
of “one stop-shopping” and extensive credit services. Because
dealers typically carry the products of multiple manufacturers,
a laboratory can order, with a single phone call to a dealer,
products from multiple sources. Without dealers, in most
instances laboratories would have to place individual calls to
each manufacturer, expend the time, and pay multiple shipping
charges to fill the same orders.
The dealer-provided reduction in transaction costs and
time represents a substantial benefit, one that the District Court
minimized when it characterized “one stop shopping” as merely
the ability to order from a single manufacturer all the materials
necessary for crown, bridge and denture construction. FF84.
Although a laboratory can call a manufacturer directly and
purchase any product made by it, FF84, the laboratory is unable
to procure from that source products made by its competitors.
Thus, purchasing through dealers, which as a class traditionally
carries the products of multiple vendors, surmounts this
shortcoming, as well as offers other advantages.
Buying through dealers also enables laboratories to take
advantage of obtaining discounts. Because they engage in price
competition to gain laboratories’ business, dealers often
discount manufacturers’ suggested laboratory price for artificial
teeth. FF69, 70. There is no finding on this record that
manufacturers offer similar discounts.
22
Another service dealers perform is taking back tooth
returns. Artificial teeth and denture returns are quite common
in dentistry. Approximately 30% of all laboratory tooth
purchases are returned for exchange or credit. FF97. The
District Court disregarded this benefit on the ground that all
manufacturers except Vita accept tooth returns. FF97.
However, in equating dealer and manufacturer returns, the
District Court overlooked the fact that using dealers, rather than
manufacturers, enables laboratories to consolidate their returns.
In a single shipment to a dealer, a laboratory can return the
products of a number of manufacturers, and so economize on
shipping, time, and transaction costs.
Conversely, when returning products directly to
manufacturers, a laboratory must ship each vendor’s product
separately and must track each exchange individually.
Consolidating returns yields savings of time, effort, and costs.
Dealers also provide benefits to manufacturers, perhaps
the most obvious of which is efficiency of scale. Using select
high-volume dealers, as opposed to directly selling to hundreds
if not thousands of laboratories, greatly reduces the
manufacturer’s distribution costs and credit risks. Dentsply, for
example, currently sells to twenty three dealers. If it were
instead to sell directly to individual laboratories, Dentsply would
incur significantly higher transaction costs, extension of credit
burdens, and credit risks.
Although a laboratory that buys directly from a
manufacturer may be able to avoid the marginal costs associated
23
with “middleman” dealers, any savings must be weighed against
the benefits, savings, and convenience offered by dealers.
In addition, dealers provide manufacturers more
marketplace exposure and sales representative coverage than
manufacturers are able to generate on their own. Increased
exposure and sales coverage traditionally lead to greater sales.
B. “Viability” of Direct Sales
The benefits that dealers provide manufacturers help
make dealers the preferred distribution channels – in effect, the
“gateways” – to the artificial teeth market. Nonetheless, the
District Court found that selling direct is a “viable” method of
distributing artificial teeth. FF71, 73, 74-81, CL26. But we are
convinced that it is “viable” only in the sense that it is
“possible,” not that it is practical or feasible in the market as it
exists and functions. The District Court’s conclusion of
“viability” runs counter to the facts and is clearly erroneous. On
the entire evidence, we are “left with the definite and firm
conviction that a mistake has been committed.” United States
v. Igbonwa, 120 F.3d 437, 440 (3d Cir. 1997) (citations and
internal quotations omitted).
It is true that Dentsply’s competitors can sell directly to
the dental laboratories and an insignificant number do. The
undeniable reality, however, is that dealers have a controlling
degree of access to the laboratories. The long-entrenched
Dentsply dealer network with its ties to the laboratories makes
it impracticable for a manufacturer to rely on direct distribution
24
to the laboratories in any significant amount. See United States
v. Visa U.S.A., 344 F.3d 229, 240 (2d Cir. 2003).
That some manufacturers resort to direct sales and are
even able to stay in business by selling directly is insufficient
proof that direct selling is an effective means of competition.
The proper inquiry is not whether direct sales enable a
competitor to “survive” but rather whether direct selling “poses
a real threat” to defendant’s monopoly. See Microsoft, 253 F.3d
at 71. The minuscule 5% and 3% market shares eked out by
direct-selling manufacturers Ivoclar and Vita, Dentsply’s
“primary competitors,” FF26, 36, 239, reveal that direct selling
poses little threat to Dentsply.
C. Efficacy of Dealer Criterion 6
Although the parties to the sales transactions consider the
exclusionary arrangements to be agreements, they are
technically only a series of independent sales. Dentsply sells
teeth to the dealers on an individual transaction basis and
essentially the arrangement is “at-will.” Nevertheless, the
economic elements involved – the large share of the market held
by Dentsply and its conduct excluding competing manufacturers
– realistically make the arrangements here as effective as those
in written contracts. See Monsanto Co. v. Spray-Rite Serv.
Corp., 465 U.S. 752, 764 n.9 (1984).
Given the circumstances present in this case, there is no
ground to doubt the effectiveness of the exclusive dealing
arrangement. In LePage’s, 324 F.3d at 162, we concluded that
3M’s aggressive rebate program damaged LePage’s ability to
25
compete and thereby harmed competition itself. LePage’s
simply could not match the discounts that 3M provided.
LePage’s, 324 F.3d at 161. Similarly, in this case, in spite of the
legal ease with which the relationship can be terminated, the
dealers have a strong economic incentive to continue carrying
Dentsply’s teeth. Dealer Criterion 6 is not edentulous.2
D. Limitation of Choice
An additional anti-competitive effect is seen in the
exclusionary practice here that limits the choices of products
open to dental laboratories, the ultimate users. A dealer locked
into the Dentsply line is unable to heed a request for a different
manufacturers’ product and, from the standpoint of
convenience, that inability to some extent impairs the
laboratory’s choice in the marketplace.
2
In some cases which we find distinguishable, courts have
indicated that exclusive dealing contracts of short duration are not
violations of the antitrust laws. See, e.g., CDC Techs., Inc. v. IDEXX
Labs., Inc., 186 F.3d 74, 81 (2d Cir. 1999) (“distributors” only
provided sales leads and sales increased after competitor imposed
exclusive dealing arrangements); Omega Envtl., Inc. v. Gilbarco, Inc.,
127 F.3d 1157, 1163 (9th Cir. 1997) (manufacturer with 55% market
share sold both to consumers and distributors, market showed
decreasing prices and fluctuating shares); Ryko Mfg. Co. v. Eden
Servs., 823 F.2d 1215 (8th Cir. 1987) (manufacturer sold its products
through both direct sales and distributors); Roland Mach. Co. v.
Dresser Indus., Inc., 749 F.2d 380 (7th Cir. 1984) (contract between
dealer and manufacturer did not contain exclusive dealing provision).
26
As an example, current and potential customers requested
Atlanta Dental to carry Vita teeth. Although these customers
could have ordered the Vita teeth from Vident in California,
Atlanta Dental’s tooth department manager believed that they
were interested in a local source. Atlanta Dental chose not to
add the Vita line after being advised that doing so would cut off
access to Dentsply teeth, which constituted over 90% of its tooth
sales revenue.
Similarly, DLDS added Universal and Vita teeth to meet
customers’ requests, but dropped them after Dentsply threatened
to stop supplying its product. Marcus Dental began selling
another brand of teeth at one point because of customer demand
in response to supply problems with Dentsply. After Dentsply
threatened to enforce Dealer Criterion 6, Marcus dropped the
other line.
E. Barriers to Entry
Entrants into the marketplace must confront Dentsply’s
power over the dealers. The District Court’s theory that any
new or existing manufacturer may “steal” a Dentsply dealer by
offering a superior product at a lower price, see Omega
Environmental, Inc. v. Gilbarco, 127 F.3d 1157 (9 th Cir. 1997),
simply has not proved to be realistic. To the contrary,
purloining efforts have been thwarted by Dentsply’s longtime,
vigorous and successful enforcement actions. The paltry
penetration in the market by competitors over the years has been
a refutation of theory by tangible and measurable results in the
real world.
27
The levels of sales that competitors could project in
wooing dealers were minuscule compared to Dentsply’s, whose
long-standing relationships with these dealers included sales of
other dental products. For example, Dentsply threatened Zahn
with termination if it started selling Ivoclar teeth. At the time,
Ivoclar’s projected $1.2 million in sales were 85% lower than
Zahn’s $8 million in Dentsply’s sales.
When approached by Leach & Dillon and Heraeus
Kulzer, Zahn’s sales of Dentsply teeth had increased to $22-$23
million per year. In comparison, the president of Zahn expected
that Leach & Dillon would add up to $200,000 (or less than 1%
of its Dentsply’s sales) and Heraeus Kulzer would contribute
“maybe hundreds of thousands.” Similarly, Vident’s $1 million
in projected sales amounted to 5.5% of its $18 million in annual
Dentsply’s sales.
The dominant position of Dentsply dealers as a gateway
to the laboratories was confirmed by potential entrants to the
market. The president of Ivoclar testified that his company was
unsuccessful in its approach to the two large national dealers
and other regional dealers. He pointed out that it is more
efficient to sell through dealers and, in addition, they offered an
entre to future customers by promotions in the dental schools.
Further evidence was provided by a Vident executive,
who testified about failed attempts to distribute teeth through ten
identified dealers. He attributed the lack of success to their fear
of losing the right to sell Dentsply teeth.
28
Another witness, the president of Dillon Company,
advised Davis, Schottlander & Davis, a tooth manufacturer, “to
go through the dealer network because anything else is
futile...[D]ealers control the tooth industry. If you don’t have
distribution with the dealer network, you don’t have
distribution.” Some idea of the comparative size of the dealer
network was illustrated by the Dillon testimony: “Zahn does $2
billion, I do a million-seven. Patterson does over a billion
dollars, I do a million-seven. I have ten employees, they have
6,000.”
Dealer Criterion 6 created a strong economic incentive
for dealers to reject competing lines in favor of Dentsply’s teeth.
As in LePage’s, the rivals simply could not provide dealers with
a comparable economic incentive to switch. Moreover, the
record demonstrates that Dentsply added Darby as a dealer “to
block Vita from a key competitive distribution point.”
According to a Dentsply executive, the “key issue” was “Vita’s
potential distribution system.” He explained that Vita was
“having a tough time getting teeth out to customers. One of their
key weaknesses is their distribution system.”
Teeth are an important part of a denture, but they are but
one component. The dealers are dependent on serving all of the
laboratories’ needs and must carry as many components as
practicable. The artificial teeth business cannot realistically be
evaluated in isolation from the rest of the dental fabrication
industry.
A leading treatise provides a helpful analogy to this
situation:
29
[S]uppose that mens’s bow ties cannot efficiently
be sold in stores that deal exclusively in bow ties*
or even ties generally; rather, they must be sold in
department stores where clerks can spread their
efforts over numerous products and the ties can be
sold in conjunction with shirts and suits. Suppose
further that a dominant bow tie manufacturer
should impose exclusive dealing on a town’s only
three department stores. In this case the rival bow
tie maker cannot easily enter. Setting up another
department store is an unneeded and a very large
investment in proportion to its own production,
which we assume is only bow ties, but any store
that offers less will be an inefficient and costly
seller of bow ties. As a result, such exclusive
dealing could either exclude the nondominant
bow tie maker or else raise its costs in comparison
to the costs of the dominant firm. While the
department stores might prefer to sell the ties of
multiple manufacturers, if faced with an “all-or-
nothing” choice they may accede to the dominant
firm’s wish for exclusive dealing. Herbert
Hovenkamp, Antitrust Law ¶ 1802e3, at 78-79
(2d ed. 2002).
* The authors do not disclose whether the bow ties are blue
polka-dot patterns or other designs.
Criterion 6 imposes an “all-or-nothing” choice on the
dealers. The fact that dealers have chosen not to drop Dentsply
30
teeth in favor of a rival’s brand demonstrates that they have
acceded to heavy economic pressure.
This case does not involve a dynamic, volatile market
like that in Microsoft, 253 F.3d at 70, or a proven alternative
distribution channel. The mere existence of other avenues of
distribution is insufficient without an assessment of their overall
significance to the market. The economic impact of an
exclusive dealing arrangement is amplified in the stagnant, no
growth context of the artificial tooth field.
Dentsply’s authorized dealers are analogous to the high
volume retailers at issue in LePage’s. Although the dealers are
distributors and the stores in LePage’s, such as K-Mart and
Staples, are retailers, this is a distinction in name without a
substantive difference. LePage’s, 324 F.3d at 144. Selling to a
few prominent retailers provided “substantially reduced
distribution costs” and “cheap, high volume supply lines.” Id.
at 160 n.14. The manufacturer sold to a few high volume
businesses and benefitted from the widespread locations and
strong customer goodwill that prominent retailers provided as
opposed to selling directly to end-user consumers or to a
multitude of smaller retailers. There are other ways across the
“river” to consumers, but high volume retailers provided the
most effective bridge.
The same is true here. The dealers provide the same
advantages to Dentsply, widespread locations and long-standing
relationships with dental labs, that the high volume retailers
provided to 3M. Even orders that are drop-shipped directly
from Dentsply to a dental lab originate through the dealers. This
31
underscores that Dentsply’s dealers provide a critical link to
end-users.
Although the District Court attributed some of the lack of
competition to Ivoclar’s and Vident’s bad business decisions,
that weakness was not ascribed to other manufacturers.
Logically, Dealer Criterion 6 cannot be both a cause of the
competitors’ lower promotional expenditures which hurt their
market positions, and at the same time, be unrelated to their
exclusion from the marketplace. Moreover, in Microsoft, in
spite of the competitors’ self-imposed problems, the Court of
Appeals held that Microsoft possessed monopoly power because
it benefitted from a significant barrier to entry. Microsoft, 253
F.3d at 55.
Dentsply’s grip on its 23 authorized dealers effectively
choked off the market for artificial teeth, leaving only a small
sliver for competitors. The District Court erred when it
minimized that situation and focused on a theoretical feasibility
of success through direct access to the dental labs. While we
may assume that Dentsply won its preeminent position by fair
competition, that fact does not permit maintenance of its
monopoly by unfair practices. We conclude that on this record,
the Government established that Dentsply’s exclusionary
policies and particularly Dealer Criterion 6 violated Section 2.
V. BUSINESS JUSTIFICATION
As noted earlier, even if a company exerts monopoly
power, it may defend its practices by establishing a business
justification. The Government, having demonstrated harm to
32
competition, the burden shifts to Dentsply to show that Dealer
Criterion 6 promotes a sufficiently pro-competitive objective.
United States v. Brown Univ., 5 F.3d 658, 669 (3d Cir. 1993).
Significantly, Dentsply has not done so. The District Court
found that “Dentsply’s asserted justifications for its exclusionary
policies are inconsistent with its announced reason for the
exclusionary policies, its conduct enforcing the policy, its rival
suppliers’ actions, and dealers’ behavior in the marketplace.”
FF356.
Some of the dealers opposed Dentsply’s policy as
exerting too much control over the products they may sell, but
the grandfathered dealers were no less efficient than the
exclusive ones, nor was there any difference in promotional
support. Nor was there any evidence of existence of any
substantial variation in the level of service provided by
exclusive and grandfathered dealers to the laboratories.
The record amply supports the District Court’s
conclusion that Dentsply’s alleged justification was pretextual
and did not excuse its exclusionary practices.
VI. AVAILABILITY OF
SHERMAN ACT SECTION 2 RELIEF
One point remains. Relying on dicta in Tampa Electric
Co. v. Nashville Coal Co., 365 U.S. 320 (1961), the District
Court said that because it had found no liability under the
stricter standards of Section 3 of the Clayton Act, it followed
that there was no violation of Section 2 of the Sherman Act.
However, as we explained in LePage’s v. 3M, 324 F.3d at 157
33
n.10, a finding in favor of the defendant under Section 1 of the
Sherman Act and Section 3 of the Clayton Act, did not
“preclude the application of evidence of . . . exclusive dealing
to support the [Section] 2 claim.” All of the evidence in the
record here applies to the Section 2 claim and, as in LePage’s,
a finding of liability under Section 2 supports a judgment
against defendant.
We pointed out in Allegheny County Sanitary Authority
v. EPA, 732 F.2d 1167, 1172-73 (3d Cir. 1984), that different
theories may be presented to establish a cause of action. A
court’s refusal to accept one theory rather than another neither
undermines the claim as a whole, nor the judgment applying one
of the theories. Here, the Government can obtain all the relief
to which it is entitled under Section 2 and has chosen to follow
that path without reference to Section 1 of the Sherman Act or
Section 3 of the Clayton Act. We find no obstacle to that
procedure.
Accordingly, for the reasons set forth above, we will
reverse the judgment in favor of Dentsply and remand the case
to the District Court with directions to grant injunctive relief
requested by the Government and for such other proceedings as
are consistent with this opinion.
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34