McWane, Inc. v. Federal Trade Commission

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[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 14-11363
________________________
Agency No. 9351
MCWANE, INC.,
Petitioner,
versus
FEDERAL TRADE COMMISSION,
Respondent.
________________________
Petition for Review of a Decision of the
Federal Trade Commission
________________________
(April 15, 2015)
Before MARCUS, and JILL PRYOR, Circuit Judges, and HINKLE, ∗ District
Judge.
MARCUS, Circuit Judge:
∗
Honorable Robert L. Hinkle, United States District Judge for the Northern District of Florida,
sitting by designation.
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This antitrust case involves allegedly anticompetitive conduct in the ductile
iron pipe fittings (“DIPF”) market by McWane, Inc., a family-run company
headquartered in Birmingham, Alabama. In 2009, following the passage of federal
legislation that provided a large infusion of money for waterworks projects that
required domestic pipe fittings, Star Pipe Products entered the domestic fittings
market. In response, McWane, the dominant producer of domestic pipe fittings,
announced to its distributors that (with limited exceptions) unless they bought all
of their domestic fittings from McWane, they would lose their rebates and be cut
off from purchases for 12 weeks. The Federal Trade Commission (“FTC”)
investigated and brought an enforcement action under Section 5 of the Federal
Trade Commission Act, 15 U.S.C. § 45. The Administrative Law Judge (“ALJ”),
after a two-month trial, and then a divided Commission, found that McWane’s
actions constituted an illegal exclusive dealing policy used to maintain McWane’s
monopoly power in the domestic fittings market. The Commission issued an order
directing McWane to stop requiring exclusivity from distributors. McWane
appealed, challenging nearly every aspect of the Commission’s ruling.
After thorough review, we affirm the Commission’s order. The
Commission’s factual and economic conclusions -- identifying the relevant product
market for domestic fittings produced for domestic-only projects, finding that
McWane had monopoly power in that market, and determining that McWane’s
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exclusivity program harmed competition -- are supported by substantial evidence
in the record, as required by our deferential standard of review, and their legal
conclusions are supported by the governing law.
I.
A.
The essential facts developed in this extensive record are these. Pipe fittings
join together pipes and help direct the flow of pressurized water in pipeline
systems. They are sold primarily to municipal water authorities and their
contractors. Although there are several thousand unique configurations of fittings
(different shapes, sizes, coatings, etc.), approximately 80% of the demand is for
about 100 commonly used fittings.
Fittings are commodity products produced to American Water Works
Association (“AWWA”) standards, and any fitting that meets AWWA
specifications is interchangeable, regardless of the country of origin. Ductile iron
pipe fittings manufacturers rarely sell fittings directly to end users; instead, they
sell them to middleman distributors, who in turn sell them to end users. An end
user (e.g., a municipal water authority) will issue a “specification” for its project,
detailing the pipes, fittings, and other products required. Competing contractors
solicit bids for the specified products from distributors, who in turn seek quotes
from various manufacturers like McWane.
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End users issue either “open specifications,” permitting the use of fittings
manufactured anywhere in the world, or “domestic specifications,” requiring the
use of fittings made in the United States. An end user might issue a domestic
specification either because of its preference or due to legal procurement
requirements: certain municipal, state, and federal laws require waterworks
projects to use domestic-only fittings.1 Domestic fittings sold for use in projects
with domestic-only specifications command higher prices than imported fittings or
domestic fittings sold for use in projects with open specifications. The majority of
specifications are open, and the majority of fittings sold (approximately 80-85%)
are imported.
Historically, fittings were made by a number of American companies, most
of which offered a full line of domestic fittings. However, beginning in the 1980s,
importing fitting suppliers -- including Star Pipe Products and Sigma Corporation -
- began to make significant inroads into the market. By 2005, imported fittings
made up the vast majority of ductile iron pipe fittings sales, and the competition
from lower-priced and lower-cost imports drove most domestic manufacturers out
of the market.
1
In particular, the American Recovery and Reinvestment Act of 2009 (“ARRA”), Pub. L. No.
111-5, 123 Stat. 115, provided more than $6 billion to fund water infrastructure projects, all with
domestic-only specifications. Pennsylvania and New Jersey state laws also require domestic
materials in public projects, as do Air Force bases, certain federal programs, and various
municipalities. See, e.g., 73 Pa. Cons. Stat. § 1884, 1886; N.J. Stat. Ann. § 52:33-3; McWane,
Inc. (McWane I), 155 F.T.C. 903, 994-95 (2013).
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Today, the overall market for fittings sold in the United States -- whether
manufactured domestically or abroad, sold into both open-specification and
domestic-only projects -- is an oligopoly with three major suppliers: McWane,
Star, and Sigma. Together they account for approximately 90% of the fittings sold
in the United States. There are two national distributors, HD Supply and Ferguson,
which together account for approximately 60% of the overall waterworks
distribution market.
From April 2006 until Star entered the domestic fittings market in late 2009,
McWane was the only supplier of domestic fittings. Until 2008, McWane
produced fittings at two domestic foundries, one in Anniston, Alabama, (“Union
Foundry”) and the other in Tyler, Texas. In 2005, McWane opened a foundry to
produce fittings in China, and in 2008 it closed its Texas foundry.
In 2009, looking to take advantage of the increased demand for domestic
fittings prompted by ARRA, Star decided to enter the market for domestic DIPFs.
In June 2009, Star publicly announced at an industry conference and in a letter to
customers that it would offer domestic fittings starting in September 2009. Star
became a “virtual manufacturer” of domestic fittings, contracting with six third-
party foundries in the U.S. to produce fittings to Star’s specifications. Star also
investigated acquiring its own U.S. foundry, which the Commission found would
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have been a decidedly less costly and more efficient way to produce domestic
fittings.
In response to Star’s forthcoming entry into the domestic DIPF market,
McWane implemented its “Full Support Program” in order “[t]o protect [its]
domestic brands and market position.” This program was announced in a
September 22, 2009 letter to distributors. McWane informed customers that if they
did not “fully support McWane branded products for their domestic fitting and
accessory requirements,” they “may forgo participation in any unpaid rebates [they
had accrued] for domestic fittings and accessories or shipment of their domestic
fitting and accessory orders of [McWane] products for up to 12 weeks.” In other
words, distributors who bought domestic fittings from other companies (such as
Star) might lose their rebates or be cut off from purchasing McWane’s domestic
fittings for up to three months.2 The Full Support Program did contain two
exceptions permitting the purchase of another company’s domestic fittings: where
McWane products were not readily available, and where the customer bought
domestic fittings and accessories along with another manufacturer’s ductile iron
pipe.
2
McWane emphasizes that the policy deliberately used the words “may” and “or” to convey “a
weak stance.” However, McWane’s Vice President and General Manager Richard Tatman
recognized that “[a]lthough the words ‘may’ and ‘or’ were specifically used, the market has
interpreted the communication in the more hard line ‘will’ sense.”
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Internal documents reveal that McWane’s express purpose was to raise
Star’s costs and impede it from becoming a viable competitor. McWane executive
Richard Tatman wrote, “We need to make sure that they [Star] don’t reach any
critical market mass that will allow them to continue to invest and receive a
profitable return.” In another document, he “observed that ‘any competitor’
seeking to enter the domestic fittings market could face ‘significant blocking
issues’ if they are not a ‘full line’ domestic supplier.” McWane I, 155 F.T.C. at
1134. In yet another, McWane employees described the nascent Full Support
Program as a strategy to “[f]orce [d]istribution to [p]ick their [h]orse,” which
would “[f]orce[] Star[] to absorb the costs associated with having a more full line
before they can secure major distribution.” Mr. Tatman was concerned about the
“[e]rosion of domestic pricing if Star emerges as a legitimate competitor,” and
another McWane executive wrote that his “chief concern is that the domestic
market [might] get[] creamed from a pricing standpoint” should Star become a
“domestic supplier.”
Initially, the Full Support Program was enforced as threatened. Thus, for
example, when the Tulsa, Oklahoma branch of distributor Hajoca Corporation
purchased Star domestic fittings, McWane cut off sales of its domestic fittings to
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all Hajoca branches and withheld its rebates. 3 Other distributors testified to
abiding by the Full Support Program in order to avoid the devastating result of
being cut off from all McWane domestic fittings. For example, following the
announcement of the Full Support Program, the country’s two largest waterworks
distributors, HD Supply (with approximately a 28-35% share of the distribution
market) and Ferguson (with approximately 25%), prohibited their branches from
purchasing domestic fittings from Star unless the purchases fell into one of the Full
Support Program exceptions, and even canceled pending orders for domestic
fittings that they had placed with Star. Indeed, the Commission found that “Star
was rebuffed by some distributors even after offering a more generous rebate than
McWane.” However, some distributors also identified other factors that
contributed to their decision not to purchase from Star, including “concerns about
Star’s inventory, the quality of fittings produced at several different foundries, . . .
the timeliness of delivery,” and negative past business dealings with Star.
Despite McWane’s Full Support Program, Star entered the domestic fittings
market and made sales to various distributors. From 2006 until Star’s entry in
2009, McWane was the only manufacturer of domestic fittings, with 100% of the
market for domestic-only projects. By 2010, Star had gained approximately 5% of
3
McWane maintains that this was the only example of the Full Support Program’s enforcement:
“McWane never enforced the rebate program against any other distributor.” Of course, the goal
of the program was not necessarily to enforce the punishments but to dissuade customers from
leaving McWane in the first place.
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the domestic fittings market, while McWane captured the remaining 95%. Star
grew to just under 10% market share in 2011, leaving the remaining 90% for
McWane, and Star was “on pace, at the time of trial, to have its best year ever for
[d]omestic [f]ittings sales in 2012.” The Commission noted that “many
distributors made purchases under the exceptions allowed by the Full Support
Program,” but that Star’s sales in total “were small compared to the overall size of
the market.” Star estimated that if the Full Support Program had not been in place,
its sales would have been greater by a multiple of 2.5 in 2010 and by a multiple of
three in 2011.
Star never ended up building or buying a domestic foundry of its own. The
Commission found that this was because Star “believed its sales level was
insufficient to justify running its own foundry.” Star estimated that the cost of
producing fittings at its own domestic foundry would have been significantly lower
than the cost of contracting with independent foundries, and that operating its own
foundry would have allowed it to appreciably reduce its domestic fittings prices.
(This is because the third-party foundries used less specialized and less efficient
equipment, had increased logistical costs and higher labor costs, and charged a
markup plus a fee for shipping.) The Commission and the ALJ also found that the
Full Support Program was a “significant reason” that another distributor,
Serampore Industries Private, decided not to enter the domestic fittings market.
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During 2009-2010, following Star’s entry into the market and the Full
Support Program’s implementation, McWane’s production costs for domestic
fittings remained flat, but it raised its prices for domestic fittings and increased its
gross profits. These prices were relatively consistent across all states, regardless of
whether Star had entered the domestic fittings market as a rival; Star’s presence in
various states did not result in lower prices. McWane “continued to sell its
domestic fittings into domestic-only specifications at prices that earned
significantly higher gross profits than for non-domestic fittings, which faced
greater competition.” McWane, Inc. (McWane II), 2014-1 Trade Cas. (CCH) ¶
78670, 2014 WL 556261, at *17 (F.T.C. Jan. 30, 2014). Star’s average prices,
however, were higher than McWane’s in several states.
The duration of the Full Support Program is a matter of some dispute.
McWane contends that it ended the Full Support Program in early 2010,
eliminating the provision that customers might forego shipments for up to 12
weeks. But the Commission found that McWane had never “publicly withdrawn
the policy or notified distributors of any changes,” and that some distributors
believed that the policy was “still in effect.” There is also evidence that some
distributors started to ignore the Full Support Program in 2010 after they learned of
the FTC’s investigation into McWane’s practices.
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B.
On January 4, 2012, the FTC issued a seven-count administrative complaint
charging McWane, Star, and Sigma 4 with violating Section 5 of the Federal Trade
Commission Act. (In February and May of 2012, Star and Sigma entered consent
decrees with the FTC without any admission of wrongdoing, leaving McWane as
the sole defendant.) The only charge at issue on appeal is found in count six,5
which alleged that McWane’s exclusivity mandate (the Full Support Program)
constituted unlawful maintenance of a monopoly over the domestic fittings market.
The ALJ conducted a two-month trial. On May 8, 2013, he issued a 464-
page decision ruling in favor of the complaint counsel on count 6. 6 He specifically
found that the sales for projects requiring domestic fittings constituted a separate
product market in which McWane had monopoly power. McWane I, 155 F.T.C. at
1239-40, 1375-88. He ruled that McWane’s Full Support Program was an
exclusive dealing arrangement that foreclosed Star from a substantial share of the
domestic fittings market and, thereby, unlawfully maintained McWane’s
4
In a series of events irrelevant to the resolution of this appeal, Sigma entered the domestic
fittings market as an authorized distributor of McWane’s domestic fittings. See McWane II,
2014 WL 556261, at *10-11.
5
Counts 1, 2, and 3 alleged an earlier conspiracy among McWane, Sigma, and Star to stabilize
prices in the non-domestic fittings market. Counts 4 and 5 alleged that McWane’s distribution
agreement with Sigma violated the Federal Trade Commission Act. Count 7 alleged that the
same conduct targeted in Count 6 amounted to attempted monopolization.
6
The ALJ dismissed counts 1-3 but ruled in favor of the complaint counsel on counts 4-7.
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monopoly. Both McWane and the complaint counsel appealed the ALJ’s decision
to the Commission.
A divided Commission affirmed as to count 6. 7 Like the ALJ, the
Commission found that the relevant market was the supply of domestically
manufactured fittings for use in domestic-only waterworks projects, because
imported fittings are not a substitute for domestic fittings for such projects.
McWane II, 2014 WL 556261, at *13. The Commission noted that this conclusion
was bolstered by the higher prices charged for domestic fittings used in domestic-
only projects. Id. at *14. The Commission also found that McWane had
monopoly power in that market, with 90-95% market share from 2010-11 (a much
higher share than courts usually require for a prima facie showing of monopoly
power) and substantial barriers to entry in the form of major capital outlays
required to produce domestic fittings. Id. at *15-18.
The Commission agreed that McWane’s Full Support Program was an
unlawful exclusive dealing arrangement that foreclosed Star’s access to distributors
for domestic fittings and harmed competition, thereby contributing significantly to
the maintenance of McWane’s monopoly power in the market. Id. at *18-28. It
noted that HD Supply and Ferguson, the country’s two largest waterworks
7
The Commission dismissed the other six counts. As to Count 7, attempted monopolization, the
Commission deemed it “unnecessary to ask whether McWane attempted to monopolize the
market” since it had found that McWane had actually done so. McWane II, 2014 WL 556261, at
*31 n.16.
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distributors (with a combined 60% market share), prohibited their branches from
purchasing domestic fittings from Star after the Full Support Program was
announced, except through the program’s limited exceptions. Id. at *23. The
practical effect of the program, the Commission found, “was to make it
economically infeasible for distributors to drop McWane[] . . . and switch to Star.”
Id. at *24. Unable to attract distributors, Star was prevented from generating the
revenue needed to acquire its own foundry, a more efficient means of producing
domestic fittings; thus, its growth into a rival that could challenge McWane’s
monopoly power was artificially stunted. Id. at *25.
Moreover, the Commission found that there was evidence that McWane’s
exclusionary conduct had an impact on price: after the Full Support Program was
implemented, McWane raised domestic fittings prices and increased its gross
profits despite flat production costs, and it did so across states, regardless of
whether Star had entered the market as a competitor. Id. at *27.
Commissioner Wright filed a lengthy dissent. He assumed that McWane
was a monopolist in the domestic-only fittings market, agreed that the Full Support
Program was an exclusive dealing arrangement, and concluded that there was
“ample record evidence” that the program harmed Star. Id. at *46 (Wright,
dissenting). However, he contended that the government “failed to carry its burden
to demonstrate that the Full Support Program resulted in cognizable harm to
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competition.” Id. at *62. He argued that according to modern economic theory,
exclusive dealing is harmful to competition (as opposed to merely harmful to a
competitor) only if it prevents rivals from attaining a minimum efficient scale
needed to constrain a monopolist’s exercise of monopoly power. Id. at *48.
Commissioner Wright contended that the government had failed to demonstrate
such harm to competition, either through direct or indirect evidence. Specifically,
he suggested that the government had failed to show that Star’s inability to afford
its own foundry was the equivalent of its being unable to achieve minimum
efficient scale, failed to link the market foreclosure to McWane’s alleged
maintenance of monopoly power, and miscalculated the relevant foreclosure share.
Id. at *58-60. Moreover, he noted that other forms of indirect evidence --
including Star’s ability to enter the domestic fittings market and expand despite the
existence of the Full Support Program, as well as the short duration and
terminability of the exclusive dealing arrangement -- cut against a finding that
McWane’s conduct was exclusionary. 8 Id. at *61-62.
McWane filed a timely petition in this Court seeking review of the
Commissioner’s order on the lone remaining count.
8
Former FTC Commissioner Rosch -- whom Commissioner Wright replaced on the Commission
in January 2013 -- had issued similar criticisms in his dissents at both the pleading and summary
judgment stages of the case.
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II.
This Court “review[s] the FTC’s findings of fact and economic conclusions
under the substantial evidence standard.” Schering-Plough Corp. v. FTC, 402 F.3d
1056, 1062 (11th Cir. 2005); see 15 U.S.C. § 45(c) (“The findings of the
Commission as to the facts, if supported by evidence, shall be conclusive.”).
“Substantial evidence is more than a mere scintilla, and [this Court] require[s] such
relevant evidence as a reasonable mind might accept as adequate to support a
conclusion.” Schering-Plough, 402 F.3d at 1062 (quotation omitted). This
standard “forbids a court to ‘make its own appraisal of the testimony, picking and
choosing for itself among uncertain and conflicting inferences.’” Polypore Int’l,
Inc. v. FTC, 686 F.3d 1208, 1213 (11th Cir. 2012) (quoting FTC v. Algoma
Lumber Co., 291 U.S. 67, 73 (1934)). Indeed, “the possibility of drawing two
inconsistent conclusions from the evidence does not prevent an administrative
agency’s finding from being supported by substantial evidence.” Consolo v. Fed.
Mar. Comm’n, 383 U.S. 607, 620 (1966).
We review de novo the Commission’s legal conclusions and the application
of the facts to the law. Polypore Int’l, 686 F.3d at 1213. However, “we afford the
FTC some deference as to its informed judgment that a particular commercial
practice violates the Federal Trade Commission Act.” Schering-Plough, 402 F.3d
at 1063; see FTC v. Ind. Fed’n of Dentists, 476 U.S. 447, 454 (1986) (“[T]he
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identification of governing legal standards and their application to the facts found .
. . are . . . for the courts to resolve, although even in considering such issues the
courts are to give some deference to the Commission’s informed judgment that a
particular commercial practice is to be condemned as ‘unfair’ [under the Federal
Trade Commission Act].”).
McWane challenges three particular determinations by the Commission: its
market definition; its finding that McWane monopolized the domestic fittings
market; and its finding that the Full Support Program harmed competition.
Because the standard of review is essential to our analysis, we explain the
applicable standard for each of the Commission’s conclusions. All three
determinations are factual or economic conclusions reviewed only for substantial
evidence.
First, our caselaw makes clear that “[t]he definition of the relevant market is
essentially a factual question.” U.S. Anchor Mfg., Inc. v. Rule Indus., Inc., 7 F.3d
986, 994 (11th Cir. 1993). Thus, we review the FTC’s determination of market
definition -- like all its factual findings -- for substantial evidence. See Jim Walter
Corp. v. FTC, 625 F.2d 676, 682 (5th Cir. 1980) (applying the substantial evidence
standard in reviewing the FTC’s finding of market definition).9
9
In Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir.1981) (en banc), this Court
adopted as binding precedent all decisions of the old Fifth Circuit handed down prior to October
1, 1981.
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Second, the FTC’s determination that a defendant possesses monopoly
power is a factual or economic conclusion that we also review for substantial
evidence. No prior case of ours appears to hold this specifically, but this
conclusion follows from previous cases that have treated a determination that a
defendant possesses market power -- a lesser-included element of monopoly power
-- as a factual finding. See NaBanco, 779 F.2d at 605. Again, other circuits agree.
A recent opinion of this Court stated that we review the FTC’s finding of market
definition for “clear error.” Polypore Int’l, 686 F.3d at 1217. Clear error is the traditional
standard used to review a district court’s factual findings, and we employ it in reviewing a
finding of market definition by a district court judge. See, e.g., United States v. Engelhard Corp.,
126 F.3d 1302, 1305 (11th Cir. 1997); Cable Holdings of Ga., Inc. v. Home Video, Inc., 825
F.2d 1559, 1563 (11th Cir. 1987); Nat’l Bancard Corp. (NaBanco) v. VISA U.S.A., Inc., 779
F.2d 592, 604 (11th Cir. 1986). Polypore drew its “clear error” language from just such a case.
688 F.3d at 1217 (citing Engelhard, 126 F.3d at 1305). But substantial evidence, not clear error,
is the “traditional . . . standard used by courts to review agency decisions.” Am. Tower LP v.
City of Huntsville, 295 F.3d 1203, 1207 (11th Cir. 2002). Indeed, Polypore itself noted the
correct standard of review for the FTC’s factual findings earlier in the opinion. See 686 F.3d at
1213.
Other circuits follow this distinction, reviewing the FTC’s market definition finding for
substantial evidence while reviewing a district court’s market definition finding for clear error.
Compare, e.g., Olin Corp. v. FTC, 986 F.2d 1295, 1297-98 (9th Cir. 1993) (reviewing FTC’s
market definition for substantial evidence), and ProMedica Health Sys., Inc. v. FTC, 749 F.3d
559, 566 (6th Cir. 2014) (same), petition for cert. filed, No. 14-762 (Dec. 30, 2014), with, e.g.,
JBL Enters., Inc. v. Jhirmack Enters., Inc., 698 F.2d 1011, 1016 (9th Cir. 1983) (reviewing
district court’s market definition for clear error), and United States v. Cent. State Bank, 817 F.2d
22, 24 (6th Cir. 1987) (per curiam) (same).
Moreover, Polypore’s language cannot be squared with the old Fifth Circuit’s approach
in Jim Walter. In that case, the Court asked “whether there is substantial evidence to support the
FTC’s finding of a national market for tar and asphalt roofing products.” 625 F.2d at 683. After
determining that the FTC’s market definition was founded “primarily on the casual observations
of industry representatives and an economist,” the Court held that the FTC’s proposed market
was “not supported by substantial evidence” and remanded “for reconsideration of the
appropriate . . . market.” Id. Jim Walter plainly held that the FTC’s market definition is
reviewed for substantial evidence. Although Polypore may be read to say otherwise, in the case
of an intra-circuit conflict, the earlier case is binding. See Morrison v. Amway Corp., 323 F.3d
920, 929 (11th Cir. 2003).
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E.g., Realcomp II, Ltd. v. FTC, 635 F.3d 815, 829 (6th Cir. 2011) (applying
substantial evidence standard to FTC’s finding that defendant possessed substantial
market power); L.G. Balfour Co. v. FTC, 442 F.2d 1, 13 (7th Cir. 1971) (applying
substantial evidence standard to FTC’s finding that defendant possessed monopoly
power).
Finally, so too with the Commission’s determination that McWane’s
conduct harmed competition and lacked offsetting procompetitive benefits. Again,
no binding case of ours appears to deal with the particular type of Federal Trade
Commission Act violations at issue here, but we have applied the substantial
evidence standard to analogous findings under that same act and other antitrust
statutes. See Schering-Plough, 402 F.3d at 1068 (examining “whether there is
substantial evidence to support the Commission’s conclusion that [defendant’s
conduct] restrict[ed] competition” in violation of Section 1 of the Sherman Act and
Section 5 of the Federal Trade Commission Act); Foremost Dairies, Inc. v. FTC,
348 F.2d 674, 678-79 (5th Cir. 1965) (applying substantial evidence standard to
FTC’s finding of injury to competition under the Robinson-Patman Act).
This approach comports with the law in other circuits in a variety of antitrust
contexts. The Seventh Circuit put the point most clearly in a Clayton Act case:
“[T]he substantial evidence rule (like the clearly erroneous rule) applies to ultimate
as well as underlying facts, including economic judgments. . . . [T]he ultimate
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question under the Clayton Act -- whether the challenged transaction may
substantially lessen competition -- is governed by the substantial evidence rule.”
Hosp. Corp. of Am. v. FTC, 807 F.2d 1381, 1385 (7th Cir. 1986) (internal citation
omitted). Our sister circuits have applied the substantial evidence standard to
analogous economic conclusions in cases brought under the Federal Trade
Commission Act, e.g., N.C. State Bd. of Dental Exam’rs v. FTC, 717 F.3d 359,
374 (4th Cir. 2013) (applying substantial evidence standard to FTC’s determination
that defendant’s behavior “was likely to cause significant anticompetitive harms”
in violation of the Federal Trade Commission Act), aff’d, 135 S. Ct. 1101 (2015);
Realcomp II, 635 F.3d at 831-34 (applying substantial evidence standard to FTC’s
finding that defendant’s policies harmed competition in violation of the Federal
Trade Commission Act), and under other antitrust statutes, see, e.g., N. Tex.
Specialty Physicians v. FTC, 528 F.3d 346, 370 (5th Cir. 2008) (applying
substantial evidence standard to FTC’s determination that defendant’s conduct
“amounted to horizontal price-fixing that is unrelated to competitive efficiencies”
under Section 1 of the Sherman Act); Gibson v. FTC, 682 F.2d 554, 571 (5th Cir.
1982) (applying substantial evidence standard to FTC’s finding of illegal
brokerage in violation of Clayton Act § 2(c)); RSR Corp. v. FTC, 602 F.2d 1317,
1320, 1324-25 (9th Cir. 1979) (applying substantial evidence standard to FTC’s
finding under Section 7 of the Clayton Act that merger was anticompetitive);
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Fruehauf Corp. v. FTC, 603 F.2d 345, 355 (2d Cir. 1979) (same); Yamaha Motor
Co. v. FTC, 657 F.2d 971, 977 n.7 (8th Cir. 1981) (same, as to a joint venture).
The ultimate legal conclusion that a defendant’s conduct violates the Federal
Trade Commission Act is an “application of the facts to the law,” which we review
de novo, Polypore Int’l, 686 F.3d at 1213, except for the limited deference
prescribed by Indiana Federation of Dentists, 476 U.S. at 454. But the
Commission’s factual building blocks and economic conclusions -- findings of
market definition, monopoly power, and harm to competition -- are reviewed for
substantial evidence.
III.
The Commission found that McWane adopted an exclusionary distribution
policy that maintained its monopoly power in the domestic fittings market in
violation of Section 5 of the Federal Trade Commission Act, which prohibits
“[u]nfair methods of competition in or affecting commerce.” 15 U.S.C. § 45.10Although exclusive dealing arrangements are common and can be procompetitive,
10
The Commission acknowledged that violations of Section 2 of the Sherman Act
(monopolization) also constitute “unfair methods of competition” under Section 5 of the Federal
Trade Commission Act, and therefore relied on Section 2 caselaw in its analysis. See McWane
II, 2014 WL 556261, at *11 n.7 (citing Cal. Dental Ass’n v. FTC, 526 U.S. 756, 762 & n.3
(1999); FTC v. Motion Picture Adver. Serv. Co., 344 U.S. 392, 394-95 (1953)); see also William
Holmes & Melissa Mangiaracina, Antitrust Law Handbook § 7:2 (2014) (“For the most part . . .
the [Federal Trade Commission Act] has been held coterminous with the Sherman and Clayton
Acts.”). Both parties (and the dissenting Commissioner) agree that this is the correct analytical
approach.
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particularly in competitive markets, see Race Tires Am., Inc. v. Hoosier Racing
Tire Corp., 614 F.3d 57, 76 (3d Cir. 2010), these arrangements can harm
competition in certain circumstances, see Jefferson Parish Hosp. Dist. No. 2 v.
Hyde, 466 U.S. 2, 45 (1984) (O’Connor, J., concurring) (“Exclusive dealing can
have adverse economic consequences by allowing one supplier of goods or
services unreasonably to deprive other suppliers of a market for their goods . . .”),
abrogated on other grounds by Ill. Tool Works Inc. v. Ind. Ink, Inc., 547 U.S. 28(2006); Jonathan M. Jacobson, Exclusive Dealing, “Foreclosure,” and Consumer
Harm, 70 Antitrust L.J. 311, 328 (2002) (“The concern [with exclusive dealing
arrangements] is . . . that creating or increasing market power through exclusive
dealing is the means by which the defendant is likely to increase prices, restrict
output, reduce quality, slow innovation, or otherwise harm consumers.”). When a
market is competitive, the “competition for the [exclusive] contract is a vital form
of rivalry” that can induce the offering firm to provide price reductions or
improved services to buyers, to the ultimate benefit of consumers. See Menasha
Corp. v. News Am. Mktg. In-Store, Inc., 354 F.3d 661, 663 (7th Cir. 2004). But,
notably, in the absence of such competition, a dominant firm can impose exclusive
deals on downstream dealers to “strengthen[] or prolong[] [its] market position.”
IIIB Philip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 760b7, at 54 (3d ed.
2008). Thus, while such arrangements are “not illegal in themselves,” they can run
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afoul of antitrust laws as “an improper means of maintaining a monopoly.” United
States v. Dentsply Int’l, Inc., 399 F.3d 181, 187 (3d Cir. 2005).
A violation of Section 5 of the Federal Trade Commission Act premised on
monopolization requires proof of “(1) the possession of monopoly power in the
relevant market and (2) the willful acquisition or maintenance of that power as
distinguished from growth or development as a consequence of a superior product,
business acumen, or historic accident.” Morris Commc’ns Corp. v. PGA Tour,
Inc., 364 F.3d 1288, 1293-94 (11th Cir. 2004) (quoting United States v. Grinnell
Corp., 384 U.S. 563, 570-71 (1966)) (internal quotation mark omitted). Thus, for
the Commission’s conclusion that McWane violated the Federal Trade
Commission Act to stand, it must have successfully defined the relevant market,
demonstrated that McWane had monopoly power in that market, and showed that
McWane’s Full Support Program constituted the illegal maintenance of that
monopoly power. McWane challenges all three of the Commission’s
determinations, and we address each of them in turn.
A. Monopoly Power in the Relevant Market
1. Market Definition
“Defining the market is a necessary step in any analysis of market power and
thus an indispensable element in the consideration of any monopolization . . . case
arising under section 2.” U.S. Anchor, 7 F.3d at 994. A product market consists of
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“products that have reasonable interchangeability for the purposes for which they
are produced.” United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 404
(1956). “The reasonable interchangeability of use or the cross-elasticity of demand
between a product and its substitutes constitutes the outer boundaries of a product
market for antitrust purposes.” U.S. Anchor, 7 F.3d at 995 (footnote omitted).
“Cross-elasticity of demand” measures the extent to which modest variations in the
price of one good affect customer demand for another good. “[A] high cross-
elasticity of demand indicates that the two products in question are reasonably
interchangeable substitutes for each other and hence are part of the same market.”
Jacobs v. Tempur-Pedic Int’l, Inc., 626 F.3d 1327, 1337 n.13 (11th Cir. 2010).
In defining product markets, this Court has long looked to the factors set
forth by the Supreme Court in Brown Shoe Co. v. United States, 370 U.S. 294(1962), including “industry or public recognition of the submarket as a separate
economic entity, the product’s peculiar characteristics and uses, unique production
facilities, distinct customers, distinct prices, sensitivity to price changes, and
specialized vendors.” Polypore Int’l, 686 F.3d at 1217 (quoting U.S. Anchor, 7
F.3d at 995). Again, we are obliged to review the Commission’s market definition
for substantial evidence.
A relevant geographic market also must be defined. See, e.g., Am. Key
Corp. v. Cole Nat’l Corp., 762 F.2d 1569, 1579 (11th Cir. 1985). The Commission
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(and the ALJ) defined the relevant geographic market as the United States. Neither
party contests this determination.
As for the product market, the Commission, agreeing with the ALJ, found
that the relevant market was one “for the supply of domestically-manufactured
fittings for use in . . . projects with domestic-only specifications.” McWane II,
2014 WL 556261, at *13. It noted that various laws and end-user preferences
requiring projects to use domestic fittings precluded imported fittings from being
“reasonable substitutes” for those projects, even though the fittings themselves are
functionally identical. Id.; see IIB Phillip E. Areeda, Herbert Hovenkamp & John
Solow, Antitrust Law ¶ 572b, at 430 (3d ed. 2007) (“To the extent that regulation
limits substitution, it may define the extent of the market.”). The Commission also
noted that McWane charged higher prices for (and reaped greater profits from)
domestic fittings in domestic-only projects: the ALJ found that McWane charged
approximately 20%-95% more for its domestic fittings for domestic-only projects
than for open-specification projects. This price differentiation reflected McWane’s
ability to target customers with domestic-only project specifications who could not
avoid the higher prices by substituting imported fittings. Indeed, Brown Shoe
specifically identified “distinct prices” as a factor indicating a separate product
market. 370 U.S. at 325.
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McWane contends, however, that domestic and imported fittings are, in fact,
interchangeable, because some customers (those whose projects’ specifications are
not dictated by law) can “flip” their projects from domestic-only to open, thereby
turning imported fittings into a reasonable substitute. However, the Commission
found, based on testimony in the record, that “flipping typically only occurs when
domestic fittings are unavailable, rather than as a result of competition between
domestic and imported fittings.” McWane II, 2014 WL 556261, at *15. This is
consonant with the ALJ’s finding that end users with domestic-only preferences
“are aware of, but not sensitive to, the price differential between domestic fittings
and import fittings.” McWane I, 155 F.T.C. at 999.
McWane also alleges that the Commission’s definition was insufficient as a
matter of law because it “was unsupported by an expert economic test,” which
McWane claims is a requirement under Eleventh Circuit caselaw. It is true that in
some circumstances we have said that a market definition “must be based on expert
testimony.” Bailey v. Allgas, Inc., 284 F.3d 1237, 1246 (11th Cir. 2002); see Am.
Key Corp., 762 F.2d at 1579 (“Construction of a relevant economic market . . .
cannot . . . be based upon lay opinion testimony.”). Such testimony can be
insufficient when “conclusory” or “based upon insufficient economic analysis.”
Gulfstream Park Racing Ass’n, Inc. v. Tampa Bay Downs, Inc., 479 F.3d 1310,
1313 (11th Cir. 2007) (per curiam); see Bailey, 284 F.3d at 1246-47 (finding that
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plaintiff’s expert testimony, which failed to consider alternative products in
defining relevant market, was insufficient as a matter of law).
But in this case, the Commission did rely in part on the complaint counsel’s
expert witness, Dr. Laurence Schumann, who considered a hypothetical
monopolist test and the lack of interchangeability between domestic and imported
fittings in domestic-only projects. Nevertheless, McWane claims that the expert’s
analysis was insufficient because it did not involve an econometric analysis, such
as a cross-elasticity of demand study. However, there appears to be no support in
the caselaw for McWane’s claim that such a technical analysis is always required.
Indeed, as the Commission correctly noted, “[c]ourts routinely rely on qualitative
economic evidence to define relevant markets.” McWane II, 2014 WL 556261, at
*14. Thus, for example, in Polypore, the Commission’s market definition was
affirmed by this Court on the basis of the Brown Shoe factors, apparently without
an econometric study. 686 F.3d at 1217-18. Given the identification of persistent
price differences between domestic fittings and imported fittings, the distinct
customers, and the lack of reasonable substitutes in this case, there was sufficient
evidence to support the Commission’s market definition.
2. Monopoly Power
“As a legal matter, Sherman Act § 2 requires that the defendant either have
monopoly power or a dangerous probability of achieving it . . .” XI Philip E.
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Areeda & Herbert Hovenkamp, Antitrust Law ¶ 1800c5, at 22 (3d ed. 2011);
accord Dentsply, 399 F.3d at 187 (“A prerequisite for [a § 2 violation] is a finding
that monopoly power exists.”). Monopoly power is the ability “to control prices or
exclude competition.” Grinnell, 384 U.S. at 571 (quotation omitted). However,
“[b]ecause . . . direct proof [of the ability to profitably raise prices substantially
above the competitive level] is only rarely available, courts more typically examine
market structure in search of circumstantial evidence of monopoly power.” United
States v. Microsoft Corp., 253 F.3d 34, 51 (D.C. Cir. 2001) (en banc) (per curiam).
Courts regularly ask whether the firm has a predominant market share, see Bailey,
284 F.3d at 1246 (“Because demand is difficult to establish with accuracy,
evidence of a seller’s market share may provide the most convenient circumstantial
measure of monopoly power.”), and look to other circumstantial factors such as
“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,” Dentsply, 399 F.3d at 187.
In determining that McWane had monopoly power, the Commission found
that McWane’s market share of the domestic fittings market had been 100% from
2006 until Star’s entry into the market in 2009. McWane’s market share was then
approximately 95% in 2010 and approximately 90% in 2011, “far exceed[ing] the
levels that courts typically require to support a prima facie showing of monopoly
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power.” McWane II, 2014 WL 556261, at *16. It also observed that there were
“substantial barriers to entry in the domestic fittings market” both for brand new
entrants and for those who already supply imported fittings. Id. Although Star
was able to enter the market, the Commission noted that its share remained below
10% in 2010 and 2011, and, notably, its entry had no effect on McWane’s prices.
The Commission reasoned that McWane’s “ability to control prices” in the market
“provide[d] direct evidence of [its] monopoly power.” Id. at *18.
The difficulty in this case is that the circumstantial evidence does not all
point in the same direction. McWane’s market share during the relevant time
period is plainly high enough to be considered predominant. See Eastman Kodak
Co. v. Image Technical Servs., Inc., 504 U.S. 451, 481 (1992) (80-95% market
share sufficient to establish monopoly power); Grinnell, 384 U.S. at 571 (87%
sufficient); Dentsply, 399 F.3d at 188 (market share between 75-80% is “more than
adequate to establish a prima facie case of [monopoly] power”); Colo. Interstate
Gas Co. v. Natural Gas Pipeline Co. of Am., 885 F.2d 683, 694 n.18 (10th Cir.
1989) (“[To establish monopoly power,] lower courts generally require a minimum
market share of between 70% and 80%.”); Cliff Food Stores, Inc. v. Kroger, Inc.,
417 F.2d 203, 207 n.2 (5th Cir. 1969) (“[S]omething more than 50% of the market
is a prerequisite to a finding of monopoly”). Standing alone, this would seem to be
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sufficient evidence to support the Commission’s conclusion that McWane had
monopoly power in the domestic fittings market.
However, there is also evidence that, despite the presence of the Full
Support Program, Star was still able to enter the domestic fittings market and
expand its market share from 0% in 2009 to approximately 5% in 2010 to
approximately 10% in 2011, while McWane’s market share correspondingly
declined. McWane contends that this “clear and successful entry” and growth by a
competitor precludes a finding of monopoly power by demonstrating a lack of
barriers to entry in the market. The Commission disagreed, finding that, despite
Star’s entry and growth, substantial barriers to entry existed in both the overall
fittings market and the domestic fittings market. The ALJ found (and the
Commission agreed) that “a significant capital investment” is required to enter the
overall fittings market, McWane I, 155 F.T.C. at 1113, as “new entrant[s] must
overcome existing relationships between existing manufacturers[,] and the
[d]istributors[,] and [e]nd [u]sers,” in addition to “develop[ing] hundreds of
patterns and moldings,” id. at 1114. All told, the Commission agreed with the ALJ
that a de novo entrant would need approximately three to five years to enter the
fittings market. McWane II, 2014 WL 556261, at *16. Star, as an established
player in the overall fittings market, did not face all of these obstacles in entering
the domestic fittings market. (For example, it had pre-existing relationships with
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some distributors and did not need to alter its sales team.) Nevertheless, the
Commission found that significant barriers to entry existed in the domestic market,
as Star still needed to purchase its own foundry or contract with third-party
domestic foundries. Id.; see Bailey, 284 F.3d at 1256 (“Entry barriers include . . .
capital outlays required to start a new business . . . .”). Moreover, the Commission
found that the Full Support Program itself posed a barrier to entry by shrinking the
number of available distributors. In support of this argument, the Commission
observed that two other suppliers of imported fittings, Sigma Corporation and
Serampore Industries Private, considered entering the domestic fittings market but
ultimately concluded that the costs and challenges were too high. McWane II,
2014 WL 556261, at *17.
Some caselaw from other circuits appears to support McWane. See Tops
Mkts., Inc. v. Quality Mkts., Inc., 142 F.3d 90, 99 (2d Cir. 1998) (“We cannot be
blinded by market share figures and ignore marketplace realities, such as the
relative ease of competitive entry. . . . [A competitor’s] successful entry . . . refutes
any inference of the existence of monopoly power that might be drawn from [the
defendant’s] market share.”).11 But not all courts agree. See Rebel Oil Co. v. Atl.
Richfield Co., 51 F.3d 1421, 1440 (9th Cir. 1995) (“The fact that entry has
11
It is worth noting, however, that the defendant in Tops Markets had a lower market share than
McWane -- 74% as opposed to over 90% -- and the plaintiffs “failed to produce any . . . evidence
to rebut [the defendant’s] assertion” that the market contained no barriers to entry. 142 F.3d at
99. In this case, as we noted, the complaint alleged and the Commission found significant entry
barriers.
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occurred does not necessarily preclude the existence of ‘significant’ entry barriers.
If the output or capacity of the new entrant is insufficient to take significant
business away from the predator, they are unlikely to represent a challenge to the
predator’s market power.”); Reazin v. Blue Cross & Blue Shield of Kan., Inc., 899
F.2d 951, 971 (10th Cir. 1990) (rejecting defendant’s argument that presence of
multiple competitors demonstrated that entry barriers were insubstantial where “no
other entrant remotely approached [defendant’s] domination of the market”); Oahu
Gas Serv., Inc. v. Pac. Res. Inc., 838 F.2d 360, 366-67 (9th Cir. 1988) (“A
declining market share may reflect an absence of market power, but it does not
foreclose a finding of such power.” (quotation omitted)). No decision of this Court
appears to be directly on point.
In addition to McWane’s overwhelming (albeit declining) market share, the
Commission cited the particular importance of Star’s inability to constrain
McWane’s pricing for domestic fittings. After Star’s entry, McWane continued to
sell domestic fittings for domestic-only products at prices that “earned significantly
higher gross profits than for non-domestic fittings, which faced greater
competition.” McWane II, 2014 WL 556261, at *17. Indeed, McWane’s prices
and profits for domestic fittings rose in 2010, the year after Star’s entry.
On this record, we are unprepared to say that Star’s entry and growth
foreclose a finding that McWane possessed monopoly power in the relevant
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market. Although the limited entry and expansion of a competitor sometimes may
cut against such a finding, the evidence of McWane’s overwhelming market share
(90%), the large capital outlays required to enter the domestic fittings market, and
McWane’s undeniable continued power over domestic fittings prices amount to
sufficient evidence that “a reasonable mind might accept as adequate to support”
the Commission’s conclusion. Schering-Plough, 402 F.3d at 1062 (quotation
omitted).
B. Monopoly Maintenance
Having established that McWane “possess[es] . . . monopoly power in the
relevant market,” we turn to the question of whether the government proved that
McWane engaged in “the willful . . . maintenance of that power as distinguished
from growth or development as a consequence of a superior product, business
acumen, or historic accident.” Morris Commc’ns, 364 F.3d at 1293-94 (quoting
Grinnell, 384 U.S. at 570-71).
As we’ve observed, exclusive dealing arrangements are not per se unlawful,
but they can run afoul of the antitrust laws when used by a dominant firm to
maintain its monopoly. Of particular relevance to this case, an exclusive dealing
arrangement can be harmful when it allows a monopolist to maintain its monopoly
power by raising its rivals’ costs sufficiently to prevent them from growing into
effective competitors. See XI Areeda & Hovenkamp, supra, ¶ 1804a, at 116-17
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(describing how exclusive contracts can raise rivals’ costs and harm competition);
see generally Thomas G. Krattenmaker & Steven C. Salop, Anticompetitive
Exclusion: Raising Rivals’ Costs to Achieve Power Over Price, 96 Yale L.J. 209(1986). The following description seems particularly appropriate here:
[S]uppose an established manufacturer has long held a dominant
position but is starting to lose market share to an aggressive young
rival. A set of strategically planned exclusive-dealing contracts may
slow the rival’s expansion by requiring it to develop alternative outlets
for its product, 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.
XI Areeda & Hovenkamp, supra, ¶ 1802c, at 76; see ZF Meritor, LLC v. Eaton
Corp., 696 F.3d 254, 271 (3d Cir. 2012); Dentsply, 399 F.3d at 191.
Tracking this economic argument, the Commission’s theory is that
McWane’s Full Support Program was an exclusive dealing policy designed
specifically to maintain its monopoly power “by impairing the ability of rivals to
grow into effective competitors that might erode the firm’s dominant position.”
McWane II, 2014 WL 556261, at *19. To prevail, the FTC must establish that
McWane “has engaged in anti-competitive conduct that reasonably appears to be a
significant contribution to maintaining monopoly power.” Dentsply, 399 F.3d at
187; accord Microsoft, 253 F.3d at 79 (quoting III Phillip E. Areeda & Herbert
Hovenkamp, Antitrust Law ¶ 650c, at 69 (1996)).
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Neither the Supreme Court nor this Circuit has provided a clear formula with
which to evaluate an exclusive dealing monopoly maintenance claim, but the D.C.
Circuit has synthesized a structured, “rule of reason”-style approach to
monopolization cases that has been cited with approval. See Jacobson, supra, at
364-69; III Areeda & Hovenkamp, supra, ¶ 651, at 97 n.1. First, the government
must show that the monopolist’s conduct had the “anticompetitive effect” of
“harm[ing] competition, not just a competitor.” Microsoft, 253 F.3d at 58-59. If
the government succeeds in demonstrating this anticompetitive harm, the burden
then shifts to the defendant to present procompetitive justifications for the
exclusive conduct, which the government can refute. Microsoft, 253 F.3d at 59;
Dentsply 399 F.3d at 196; see Eastman Kodak, 504 U.S. at 482-84 (describing
defendant’s proffered “valid business reasons” for its actions and plaintiff’s
rebuttal). If the court accepts the defendant’s proffered justifications, it must then
decide whether the conduct’s procompetitive effects outweigh its anticompetitive
effects. Microsoft, 253 F.3d at 59. This approach mirrors rule of reason analysis.
See Schering-Plough, 402 F.3d at 1064-65 (outlining a substantially similar
burden-shifting approach in “traditional rule of reason analysis”).
The Commission followed this approach. It found that McWane’s Full
Support Program was an exclusive dealing policy that harmed competition by
foreclosing Star’s access to necessary distributors and contributed significantly to
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Star’s lost sales and subsequent inability to purchase its own foundry and expand
output. It considered McWane’s procompetitive justifications but ultimately found
them unpersuasive.
McWane challenges each aspect of the Commission’s ruling: first, it says
that its Full Support Program was “presumptively legal” because it was non-
binding and short-term; second, it contends that the government failed to carry its
burden of establishing harm to competition; third, it argues that the Commission
wrongly rejected its proffered procompetitive justifications. We address each
claim in turn.
1. Presumptive Legality
McWane suggests that the Full Support Program lacked the characteristics
of anticompetitive exclusive dealing arrangements. Specifically, it urges that the
Full Support Program was “presumptively legal” and “[could not] harm
competition” because it was short-term and voluntary (rather than a binding
contract of a longer term). No binding precedent from the Supreme Court or this
Court speaks specifically to this issue, but McWane hangs its hat on caselaw from
other circuits. See, e.g., Omega Envtl. v. Gilbarco, Inc., 127 F.3d 1157, 1163 (9th
Cir. 1997) (“[T]he short duration and easy terminability of these [one-year]
agreements negate substantially their potential to foreclose competition.” (footnote
omitted)); Roland Mach. Co. v. Dresser Indus., Inc., 749 F.2d 380, 395 (7th Cir.
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1984) (“Exclusive-dealing contracts terminable in less than a year are
presumptively lawful under section 3 [of the Clayton Act].”); Jacobson, supra, at
351-52 & n.195.
But not all courts agree. The Third Circuit in Dentsply held that where
exclusive deals were “technically only a series of independent sales,” they
nevertheless constituted antitrust violations because “the economic elements
involved -- the large share of the market held by [the defendant] and its conduct
excluding competing manufacturers -- realistically ma[d]e the arrangements . . . as
effective as those in written contracts.” 399 F.3d at 193. The Dentsply court noted
that “in spite of the legal ease with which the relationship can be terminated, the
[distributors] have a strong economic incentive to continue [buying defendant’s
product].” Id. at 194; see also ZF Meritor, 696 F.3d at 270 (“[D]e facto exclusive
dealing claims are cognizable under the antitrust laws.”); Minn. Mining & Mfg.
Co. v. Appleton Papers, Inc., 35 F. Supp. 2d 1138, 1144 (D. Minn. 1999)
(evaluating an exclusive dealing arrangement’s “practical effect” rather than
“merely . . . its form” in determining whether it was terminable at will (internal
quotation marks omitted)). The Third Circuit distinguished opposing cases by
noting that those situations primarily involved markets in which firms could viably
sell directly to consumers even when foreclosed from distributors, Dentsply, 399
F.3d at 194 n.2, whereas in Dentsply direct sales were not “a practical alternative
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for most [competing] manufacturers,” id. at 189. Likewise, in the case at hand,
both the Commission and the ALJ found that distributors were essential to the
domestic fittings market: “No evidence supports the existence of viable alternate
distribution channels, including direct sales to end users.” McWane II, 2014 WL
556261, at *23.
This approach is consistent with the Supreme Court’s instruction to look at
the “practical effect” of exclusive dealing arrangements. Tampa Elec. Co. v.
Nashville Coal Co., 365 U.S. 320, 326-28 (1961); see also Eastman Kodak, 504
U.S. at 466-67 (“Legal presumptions that rest on formalistic distinctions rather
than actual market realities are generally disfavored in antitrust law. This Court
has preferred to resolve antitrust claims on a case-by-case basis, focusing on the
‘particular facts disclosed by the record.’” (quoting Maple Flooring Mfrs. Ass’n v.
United States, 268 U.S. 563, 579 (1925))). The Commission adopted this
approach, looking to “the reality of [the] marketplace” and finding that “the
practical effect of McWane’s program was to make it economically infeasible for
distributors to . . . switch to Star.” McWane II, 2014 WL 556261, at *24. Even the
dissenting commissioner agreed with this approach. Id. at *55 n.38 (Wright,
dissenting). So do we.
Moreover, the nature of the Full Support Program arguably posed a greater
threat to competition than a conventional exclusive dealing contract, as it lacked
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the traditional procompetitive benefits of such contracts. As we’ve noted, courts
often take a permissive view of such contracts on the grounds that firms compete
for exclusivity by offering procompetitive inducements (e.g., lower prices, better
service). But not here. The Full Support Program was “unilaterally imposed” by
fiat upon all distributors, and the ALJ found that it resulted in “no competition to
become the exclusive supplier” and no “discount, rebate, or other consideration”
offered in exchange for exclusivity. McWane I, 155 F.T.C. at 1414. This is
consistent with evidence that McWane’s prices rose, rather than fell, in the wake of
the program.
We are disposed to follow the Supreme Court’s instruction that we consider
“market realities” rather than “formalistic distinctions” in rejecting McWane’s
argument that the specific form of its exclusivity mandate insulated it from
antitrust scrutiny.
2. Harm to Competition
We turn then to the first step in the monopolization test: the government
must demonstrate that the defendant’s challenged conduct had anticompetitive
effects, harming competition.
As with many areas of antitrust law, the federal judiciary’s approach to
evaluating exclusive dealing has undergone significant evolution over the past
century. Under the approach laid out by the Supreme Court in Standard Oil Co. of
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California and Standard Stations, Inc. v. United States (Standard Stations), 337
U.S. 293 (1949), all that was required for an exclusive deal to violate the Clayton
Act was proof of substantial foreclosure -- “proof that competition ha[d] been
foreclosed in a substantial share of the line of commerce affected.” Id. at 314. The
Supreme Court amended that approach in Tampa Electric, in which it continued to
emphasize the importance of substantial foreclosure, but opened the door to a
broader analysis. See 365 U.S. at 328-29.
Lower federal courts have burst through that door over the past 50 years,
interpreting Tampa Electric as authorizing a rule of reason approach to exclusive
dealing cases. See, e.g., ZF Meritor, 696 F.3d at 271 (characterizing Tampa
Electric as standing for the proposition that “exclusive dealing agreements . . . [are]
judged under the rule of reason”); Jacobson, supra, at 322 (noting that “later cases
have suggested” that Tampa Electric “authorize[d] full-scale rule of reason
analysis”); XI Areeda & Hovenkamp, supra, ¶ 1820b, at 177 (“Most decisions
follow the language in the Supreme Court’s Tampa Electric decision indicating
that a complete rule of reason analysis is essential, and foreclosure percentages
represent only a first step in the inquiry.”). This Court, without specifically citing
Tampa Electric, has joined the consensus that exclusive dealing arrangements are
“reviewed under the rule of reason.” DeLong Equip. Co. v. Washington Mills
Abrasive Co., 887 F.2d 1499, 1508 n.12 (11th Cir. 1989).
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The difference between the traditional rule of reason and the rule of reason
for exclusive dealing is that in the exclusive dealing context, courts are bound by
Tampa Electric’s requirement to consider substantial foreclosure. See Microsoft,
253 F.3d at 69. But foreclosure is usually no longer sufficient by itself; rather, it
“serves a useful screening function” as a proxy for anticompetitive harm. Id.Thus, foreclosure is one of several factors we now examine in determining whether
the conduct harmed competition. See Jacobson, supra, at 361-64; XI Areeda &
Hovenkamp, supra, ¶ 1821d, at 197 (“[Foreclosure percentages] are seldom
decisive in and of themselves. Rather, they provide the jumping-off point for
further analysis.”). We will also look for direct evidence that the challenged
conduct has affected price or output, along with other indirect evidence, such as the
degree of rivals’ exclusion, the duration of the exclusive deals, and the existence of
alternative channels of distribution. XI Areeda & Hovenkamp, supra, ¶ 1821d, at
197-209. The ultimate question remains whether the defendant’s conduct harmed
competition.
To effect anticompetitive harm, a defendant “must harm the competitive
process, and thereby harm consumers. In contrast, harm to one or more
competitors will not suffice.” Microsoft, 253 F.3d at 58; see also Brooke Grp. Ltd.
v. Brown & Williamson Tobacco Co., 509 U.S. 209, 224 (1993). This distinction
makes good sense, particularly in a competitive market where injury to a single
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competitor may not have a significant effect on overall competition due to the
persistence of other rivals. However, competitors and competition are linked,
particularly in the right market settings: “in a concentrated market with very high
barriers to entry, competition will not exist without competitors.” Spirit Airlines,
Inc. v. Nw. Airlines, Inc., 431 F.3d 917, 951 (6th Cir. 2005). Indeed, this is one
reason that the behavior of monopolists faces more exacting scrutiny under the
antitrust statutes. See Eastman Kodak, 504 U.S. at 488 (Scalia, J., dissenting)
(“Behavior that might otherwise not be of concern to the antitrust laws . . . can take
on exclusionary connotations when practiced by a monopolist.”); Dentsply, 399
F.3d at 187 (“Behavior that otherwise might comply with antitrust law may be
impermissibly exclusionary when practiced by a monopolist.”); IIIB Areeda &
Hovenkamp, supra, ¶ 806e, at 423.
Before we proceed, we address a point of disagreement between the
Commission, the dissenting commissioner, and the amici: the government’s burden
of proof in demonstrating harm to competition. The dissenting commissioner
insisted that, given the high likelihood that an exclusive dealing arrangement is
actually procompetitive, a plaintiff alleging illegal exclusive dealing must show
“clear evidence of anticompetitive effect.” McWane II, 2014 WL 556261, at *51
(Wright, dissenting). Applying that standard, Commissioner Wright concluded
that the government had not met its burden for several reasons, including that it
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had not sufficiently established that the Full Support Program caused the observed
price effects. The Commission countered that Commissioner Wright sought “a
new, heightened standard of proof for exclusive dealing cases” that had “no legal
support.” Id. at *26 & n.12 (majority). Although McWane does not articulate its
proposed burden of proof using the dissenting commissioner’s language, it agrees
in substance that the Commission did not prove harm to competition with
sufficient certainty.
We agree with the Commission. Putting aside the possible economic merits
of raising the standard of proof for exclusive dealing cases, we can find no
foundation for this conclusion in the caselaw. The governing Supreme Court
precedent speaks not of “clear evidence” or definitive proof of anticompetitive
harm, but of “probable effect.” Tampa Elec., 365 U.S. at 329 (instructing courts to
weigh the “probable effect of the [exclusive dealing] contract on the relevant area
of effective competition” (emphasis added)); accord ZF Meritor, 696 F.3d at 268
(“Under the rule of reason, an exclusive dealing arrangement will be unlawful only
if its ‘probable effect’ is to substantially lessen competition in the relevant market.”
(quoting Tampa Elec., 365 U.S. at 327-29)). Indeed, this Court has often
articulated the rule of reason -- the governing standard for evaluating exclusive
dealing claims, DeLong Equip. Co., 887 F.2d at 1508 n.12 -- by quoting the
Supreme Court’s instruction in Board of Trade of Chicago v. United States, 246
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U.S. 231, 238 (1918), to analyze the effects of the challenged conduct, “actual or
probable.” E.g., Jacobs v. Tempur-Pedic Int’l, Inc., 626 F.3d 1327, 1334 n.8 (11th
Cir. 2010); Schering-Plough, 402 F.3d at 1064 n.12.
Of course, the FTC’s allegation is not merely that McWane engaged in
exclusive dealing, but that it used exclusive dealing to maintain its monopoly
power. In the monopolization context, courts have articulated the government’s
burden in terms of the causality that must be shown between the defendant’s
conduct and the anticompetitive harm. These formulations, too, are framed in
terms of probability: “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.”
Dentsply, 399 F.3d at 187 (emphasis added); accord Microsoft, 253 F.3d at 79. In
Microsoft, the D.C. Circuit found no case supporting the proposition that Sherman
Act § 2 liability requires plaintiffs to “present direct proof that a defendant’s
continued monopoly power is precisely attributable to its anticompetitive conduct.”
Microsoft, 253 F.3d at 79. It noted that “[t]o require that § 2 liability turn on a
plaintiff’s ability or inability to reconstruct the hypothetical marketplace absent a
defendant’s anticompetitive conduct would only encourage monopolists to take
more and earlier anticompetitive action.” Id.; see also III Areeda & Hovenkamp,
supra, ¶ 657a2, at 162 (“[T]he government suitor need not show that competition is
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in fact less than it would be in some alternative universe in which the challenged
conduct had not occurred. It is enough to show that anticompetitive consequences
are a naturally-to-be-expected outcome of the challenged conduct.”).
We agree with the Commission and our sister circuits that in these
circumstances the government must show that the defendant engaged in
anticompetitive conduct that reasonably appears to significantly contribute to
maintaining monopoly power. As we’ve already discussed, because this
determination is an economic conclusion, the Commission’s finding on this count
must be supported by substantial evidence.
a) Substantial Foreclosure
“Substantial foreclosure” continues to be a requirement for exclusive dealing
to run afoul of the antitrust statutes. Foreclosure occurs when “the opportunities
for other traders to enter into or remain in [the] market [are] significantly limited”
by the exclusive dealing arrangements.” Microsoft, 253 F.3d at 69 (quoting Tampa
Elec., 365 U.S. at 328) (internal quotation marks omitted). Traditionally a
foreclosure percentage of at least 40% has been a threshold for liability in
exclusive dealing cases. Jacobson, supra, at 362. However, some courts have
found that a lesser degree of foreclosure is required when the defendant is a
monopolist. See Microsoft, 253 F.3d at 70 (“[A] monopolist’s use of exclusive
contracts . . . may give rise to a § 2 violation even though the contracts foreclose
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less than the roughly 40% or 50% share usually required in order to establish a § 1
violation.”).
In this case, both the Commission and the ALJ found that the Full Support
Program foreclosed Star from a substantial share of the market. Although the
Commission did not quantify a percentage, it did note that the two largest
distributors, who together controlled approximately 50-60% of distribution,
prohibited their branches from purchasing from Star (except through the Full
Support Program exceptions) following the announcement of the Full Support
Program. Indeed, HD Supply went so far as to cancel pending orders for domestic
fittings that it had placed with Star. The Commission also observed that the third-
largest distributor was initially interested in purchasing domestic fittings from Star,
but followed suit soon after the Full Support Program was announced. Testimony
in the record supports the Commission’s conclusion that this pattern recurred with
other dealers, even when Star promised lower prices than McWane. Thus, for
example, U.S. Pipe refused to purchase domestic fittings from Star, despite a
promise of lower prices, until September 2010. Likewise with TDG distributors.
Executives at Groeniger and Illinois Meter also testified that the Full Support
Program deterred them from dealing with Star. Although the Commission did not
place an exact number on the percentage foreclosed, it found that the Full Support
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Program “tie[d] up the key dealers” and that the foreclosure was “substantial and
problematic.” McWane II, 2014 WL 556261, at *24 n.10.
These factual findings are all consistent with the ALJ’s determinations, and
all pass our deferential review. Nevertheless, McWane challenges the
Commission’s conclusion by arguing that Star’s entry and growth in the market
demonstrate that, as a matter of law, the Full Support Program did not cause
substantial foreclosure. As before, when McWane raised a substantially similar
claim to rebut the Commission’s finding of monopoly power, this argument is
ultimately unpersuasive. Again, “[t]he test is not total foreclosure, but whether the
challenged practices bar a substantial number of rivals or severely restrict the
market’s ambit.” Dentsply, 399 F.3d at 191. Our sister circuits have found
monopolists liable for anticompetitive conduct where, as here, the targeted rival
gained market share -- but less than it likely would have absent the conduct. See
Conwood Co. v. U.S. Tobacco Co., 290 F.3d 768, 789-91 (6th Cir. 2002). As
noted above, exclusive dealing measures that slow a rival’s expansion can still
produce consumer injury. See XI Areeda & Hovenkamp, supra, ¶ 1802c, at 76;
accord Dentsply, 399 F.3d at 191; ZF Meritor, 696 F.3d at 271. Given the ample
evidence in the record that the Full Support Program significantly contributed to
key dealers freezing out Star, the Commission’s foreclosure determination is
supported by substantial evidence and sufficient as a matter of law.
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b) Evidence of Harm to Competition
Having concluded that the Commission’s finding of substantial foreclosure
is supported by substantial evidence, we turn to the remainder of the Commission’s
evidence that McWane’s Full Support Program injured competition. The record
contains both direct and indirect evidence that the Full Support Program harmed
competition. The Commission relied on both, and taken together they are more
than sufficient to meet the government’s burden. The Commission found that
McWane’s program “deprived its rivals . . . of distribution sufficient to achieve
efficient scale, thereby raising costs and slowing or preventing effective entry.”
McWane II, 2014 WL 556261, at *22. It found that the Full Support Program
made it infeasible for distributors to drop the monopolist McWane and switch to
Star. This, the Commission found, deprived Star of the revenue needed to
purchase its own domestic foundry, forcing it to rely on inefficient outsourcing
arrangements and preventing it from providing meaningful price competition with
McWane. Id. at *25.
Perhaps the Commission’s most powerful evidence of anticompetitive harm
was direct pricing evidence. It noted that McWane’s prices and profit margins for
domestic fittings were notably higher than prices for imported fittings, which faced
greater competition. Thus, these prices appeared to be supracompetitive. Yet in
states where Star entered as a competitor, notably there was no effect on
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McWane’s prices. Indeed, soon after Star entered the market, McWane raised
prices and increased its gross profits -- despite its flat production costs and its own
internal projections that Star’s unencumbered entry into the market would cause
prices to fall. Id. at *27. Since McWane was an incumbent monopolist already
charging supracompetitive prices (as demonstrated by the difference in price and
profit margin between domestic and imported fittings), evidence that McWane’s
prices did not fall is consistent with a reasonable inference that the Full Support
Program significantly contributed to maintaining McWane’s monopoly power.
McWane claims, however, that the government did not adequately prove
that the Full Support Program was responsible for this price behavior. But as
we’ve noted, McWane demands too high a bar for causation. While it is true that
there could have been other causes for the price behavior, the government need not
demonstrate that the Full Support Program was the sole cause -- only that the
program “reasonably appear[ed] to be a significant contribution to maintaining
[McWane’s] monopoly power.” Dentsply, 399 F.3d at 187. Moreover, under our
deferential standard of review, the mere fact that “two inconsistent conclusions”
could be drawn from the record “does not prevent [the Commission’s] finding
from being supported by substantial evidence.” Consolo, 383 U.S. at 620.
The Commission also drew on testimony from Star executives that the Full
Support Program deprived Star of the sales and revenue needed to invest in a
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domestic foundry of its own. These estimates were based in part on distributors’
withdrawn requests for quotes or orders in the wake of the Full Support Program.
Indeed, Star had identified a specific foundry to acquire and had entered
negotiations to purchase it, but after the announcement of the Full Support
Program, decided not to move forward with the purchase. Without a foundry of its
own with which to manufacture fittings, Star was forced to contract with six third-
party domestic foundries to produce raw casings -- a “more costly and less
efficient” arrangement on account of higher shipping, labor, and logistical costs;
smaller batch sizes; less specialized equipment; and various other factors.
McWane II, 2014 WL 556261, at *25. Star estimated that with its own foundry, it
could have reduced costs and substantially lowered its domestic fittings prices.
Moreover, as the ALJ found, some customers, including HD Supply and
Ferguson, were reluctant to purchase from a supplier that lacked its own foundry,
thereby further inhibiting any challenge to McWane’s market dominance.
McWane I, 155 F.T.C. at 1157, 1160. Thus, the record evidence suggests that the
Full Support Program stunted the growth of Star -- McWane’s only rival in the
domestic fittings market -- and prevented it from emerging as an effective
competitor who could challenge McWane’s supracompetitive prices.
We also consider it significant that alternative channels of distribution were
unavailable to Star. In cases where exclusive dealing arrangements tie up
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distributors in a market, courts will often consider whether alternative channels of
distribution exist. See Dentsply, 399 F.3d at 193; Omega Envtl., 127 F.3d at 1162-
63; XI Areeda & Hovenkamp, supra, ¶ 1821d4, at 203-09. If firms can use other
means of distribution, or sell directly to consumers, then it is less likely that their
foreclosure from distributors will harm competition. In Denstply, the Third Circuit
found exclusive deals with distributors to be anticompetitive where direct sales of
the market’s products (artificial teeth) to consumers was not “practical or feasible
in the market as it exists and functions.” 399 F.3d at 193. The Commission found
the same in the domestic fittings market, and the dissent agreed. Thus, Star’s
foreclosure from the major distributors was particularly likely to harm competition
in this market.
Finally, the clear anticompetitive intent behind the Full Support Program
also supports the inference that it harmed competition. Anticompetitive intent
alone, no matter how virulent, is insufficient to give rise to an antitrust violation.
See Microsoft, 253 F.3d at 60. But, as this Court has said, “[e]vidence of intent is
highly probative ‘not because a good intention will save an otherwise objectionable
regulation or the reverse; but because knowledge of intent may help the court to
interpret facts and to predict consequences.’” Graphic Prods. Distribs., Inc. v.
ITEK Corp., 717 F.2d 1560, 1573 (11th Cir. 1983) (quoting Bd. of Trade of Chi.,
246 U.S. at 238). For a monopolization charge, intent is “relevant to the question
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whether the challenged conduct is fairly characterized as ‘exclusionary’ or
‘anticompetitive’ . . . . [T]here is agreement on the proposition that ‘no monopolist
monopolizes unconscious of what he is doing.’” Aspen Skiing Co. v. Aspen
Highlands Skiing Corp., 472 U.S. 585, 602 (1985) (quoting United States v.
Aluminum Co. of Am., 148 F.2d 416, 432 (2d Cir. 1945)); see also Microsoft, 253
F.3d at 59 (“Evidence of the intent behind the conduct of a monopolist is relevant
only to the extent it helps us understand the likely effect of the monopolist’s
conduct.”).
In this case, the evidence of anticompetitive intent is particularly powerful.
Testimony from McWane executives leaves little doubt that the Full Support
Program was a deliberate plan to prevent Star from “reach[ing] any critical market
mass that will allow them to continue to invest and receive a profitable return” by
“[f]orc[ing] Star[] to absorb the costs associated with having a more full line before
they can secure major distribution.” Indeed, the plan was implemented as a
reaction to concerns about the “[e]rosion of domestic pricing if Star emerges as a
legitimate competitor.” Although such intent alone is not illegal, it could
reasonably help the Commission draw the inference that the witnessed price
behavior was the (intended) result of the Full Support Program.
Not all of the evidence adduced in this case uniformly points against
McWane. For example, as we’ve previously noted, Star was not completely
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excluded from the domestic fittings market; it was able to enter and grow despite
the presence of the Full Support Program. However, it is still perfectly plausible to
conclude on this record that Star’s growth was meaningfully (and deliberately)
slowed and its development into a rival that could constrain McWane’s monopoly
power was stunted. Cf. Microsoft, 253 F.3d at 71 (stating that defendant’s
exclusionary conduct kept the rival’s product “below the critical level necessary
for [the targeted rival] or any other rival to pose a real threat to [the defendant’s]
monopoly”). Also, the Full Support Program was not a binding contract of a
lengthy duration. As noted above, these characteristics do not render the program
presumptively lawful, but they also do not point in the FTC’s favor as an indirect
indicator of anticompetitive harm. Nevertheless, the direct and indirect evidence
of anticompetitive harm is more than sufficient to pass our deferential review.
Again, the Commission’s conclusion that the Full Support Program harmed
competition is supported by substantial evidence and sound as a matter of law.
3. Procompetitive Justifications
Having established that the defendant’s conduct harmed competition, the
burden shifts to the defendant to offer procompetitive justifications for its conduct.
As the Commission explained, “[c]ognizable justifications are typically those that
reduce cost, increase output or improve product quality, service, or innovation.”
McWane II, 2014 WL 556261, at *30 (collecting cases); see also XI Areeda &
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Hovenkamp, supra, ¶ 1822a, at 213 (“A justification is reasonable if it reduces the
defendant’s costs, minimizes risk, or lessens the danger of free riding . . . .”). Such
justifications, however, cannot be “merely pretextual.” Morris Commc’ns, 364
F.3d at 1296; see Eastman Kodak, 504 U.S. at 483-84.
McWane offers two; neither is persuasive. First, McWane says that the Full
Support Program was necessary to retain enough sales to keep its domestic foundry
afloat. The Commission rightly rejected this argument; as other courts have
recognized, such a goal is “not an unlawful end, but neither is it a procompetitive
justification.” Microsoft, 253 F.3d at 71. And as the Commission noted, the steps
McWane took to preserve its sales volume “were not the type of steps, such as a
price reduction, that typically promote consumer welfare by increasing overall
market output.” McWane II, 2014 WL 556261, at *30. McWane’s sales “did not
result from lower prices, improved service or quality, or other consumer benefits,”
but rather from reducing the output of its only rival. Id.Second, McWane offers the more sophisticated argument that the Full
Support Program was needed to keep Star from “‘cherrypick[ing]’ the core of [the]
domestic fittings business by making only the top few dozen fittings that account
for roughly 80% of all fittings sold,” while leaving McWane alone to sell the
remaining 20%. But even if McWane had good business reasons to adopt such a
strategy, and such conduct could result in increased efficiency in the right market
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conditions, McWane offers no reasons to think that such conditions exist in this
case. As the Commission noted, a full-line supplier like McWane could instead
compete “by lowering its price for [the more common] products and increasing its
price for the less common products.” Id. at *31. Again, McWane has not
explained why such a strategy would not work, how the collapse of the full line of
products would harm consumers, or why full-line forcing was instead necessary.
Thus, this argument is also unpersuasive.
Moreover, McWane’s internal documents belie the notion that the Full
Support Program was designed for any procompetitive benefit. As the
Commission noted, McWane executives discussed the Full Support Program in
terms of maintaining domestic prices and profitability by preventing Star from
becoming an effective competitor. For example, McWane executive Richard
Tatman said that his “chief concern” with Star becoming a domestic fittings
supplier was that “the domestic market [might] get[] creamed from a pricing
standpoint,” and identified the biggest risk factor of Star’s entry as the “[e]rosion
of domestic pricing if Star emerged as a legitimate competitor.” In a document
encouraging the adoption of an exclusive dealing arrangement, Tatman opined that
not doing so would allow Star to “drive profitability out of our business.” And in
an e-mail, he stated, with regard to Star, “we need to make sure that they don’t
reach any critical mass that will allow them to continue to invest and receive a
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profitable return.” The Supreme Court has looked to evidence that proffered
justifications for conduct “are merely . . . an excuse to cover up different and
anticompetitive reasons.” Jacobson, supra, at 367-68 (citing Eastman Kodak, 504
U.S. at 483). McWane’s damning internal documents seem to be powerful
evidence that its procompetitive justifications are “merely pretextual.”
IV.
All told, the Commission’s factual and economic conclusions are supported
by substantial evidence and its legal conclusions comport with the governing law.
The Commission’s determination of the relevant market and its findings of
monopoly power and anticompetitive harm pass our deferential review, and we
agree that the conduct amounts to a violation of Section 5 of the Federal Trade
Commission Act.
Accordingly, we AFFIRM.
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