Breaux Bros. Farms, Inc. v. Teche Sugar Co., Inc.

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 92-4968
BREAUX BROTHERS FARMS, INC.,
Plaintiff-Appellee,
TECHE PLANTING CO., INC. and
FRANCIS PAT ACCARDO,
Plaintiffs-Appellees,
Cross-Appellants,
versus
TECHE SUGAR CO., INC.,
SOUTH COAST SUGARS, INC.,
Defendants-Appellants,
Cross-Appellees.
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TECHE PLANTING CO., INC.,
FRANCIS PAT ACCARDO,
Plaintiffs-Appellees,
Cross-Appellants,
versus
TECHE SUGAR CO., INC.,
SOUTH COAST SUGARS, INC.,
Defendants-Appellants,
Cross-Appellees.
Appeals from the United States District Court
for the Western District of Louisiana
( May 4, 1994 )
Before WISDOM, HIGGINBOTHAM, and JONES, Circuit Judges.
HIGGINBOTHAM, Circuit Judge:
Teche Sugar Company, Inc., offered to lease to Breaux Brothers
Farms, Inc., Teche Planting, Inc., and Francis Accardo land for
farming sugar cane. Teche Sugar conditioned its offer on its
choice of a processing mill. All three sugar farmers sued in
federal district court alleging that the lease tied land to milling
in violation of the Sherman Act, 15 U.S.C. § 1. The district court
ruled in favor of the farmers and awarded damages. We are not
persuaded that any tie of land to milling was supported by market
power in the land or, relatedly, that any tie had the requisite
effect on competition. We reverse.
I.
For several years Breaux Brothers, Teche Planting, and Accardo
leased land in St. Mary Parish from the Prudential Insurance
Company. They grew sugar cane on the leased land each year, which
they processed at a mill they selected.
The right to choose the mill is valuable. A mill that can
ensure a supply of sugar cane in times of low sugar prices enjoys
an economic advantage. The present dispute arose when Teche Sugar,
then an owner of a mill, leased the land from Prudential. In an
effort to assure cane for its mill, Teche Sugar offered to sublease
land to Breaux Brothers, Teche Planting, and Accardo at a lesser
rental rate than it paid Prudential. Teche Sugar conditioned its
offer on a lessee's processing its cane at a mill selected by Teche
Sugar. Breaux Brothers agreed, but Teche Planting and Accardo
declined the offer.
2
Teche Sugar at first directed the sugar cane that Breaux
Brothers produced to the Oak Lawn Mill, which Teche Sugar owned.
Teche Sugar was still unable to generate enough cane for its mill
and closed it before its lease with Prudential expired. Teche
Sugar then designated the Raceland Sugar Mill--owned by South Coast
Sugars, Inc., the co-defendant and Teche Sugar's sister company1--
as the site for processing Breaux Brothers' sugar. Teche Sugar
allowed Breaux Brothers to send excess sugar that Raceland could
not process in a timely fashion to a nearby mill, Sterling Sugar
Mill. Subsequently, South Coast sold the Raceland Sugar Mill.
Teche Sugar then struck a deal with Sterling by which Teche Sugar
would pay Sterling a flat rate of $9 per ton to grind cane and
Teche Sugar would then sell the product at whatever profit it could
make. Teche Sugar had no financial interest in Sterling Sugar
Mill.
II.
The farmers argue that the lease Teche Sugar offered
constituted an illegal tying arrangement. A tying arrangement is
the sale or lease of one product on the condition that the buyer or
lessee purchase a second product. See Northern Pacific R.R. v.
United States, 356 U.S. 1, 5-6 (1958). The land that Breaux rented
and the grinding services of the mills are said to be separate
products.
1
Teche Sugar Company and South Coast Sugars, Inc., the two
defendants, are both wholly owned subsidiaries of South Louisiana
Sugar, Inc.
3
There is a strong support for the two product argument offered
by the functional approach in Jefferson Parish Hospital District
No. 2 v. Hyde, 466 U.S. 2, 21-25 (1984). Whether two products
exist "depends on whether the arrangement may have the type of
competitive consequences addressed by the rule." Id. at 21(footnote omitted). The argument continues that an owner of a
dominant portion of a market in sugar cane land could route the
cane its land produced to a mill under its control. This
guaranteed source of sugar might allow it to drive other mills from
the market. The land owner thus could transfer power in one market
into power in another. This presents fairly straightforward
antitrust doctrine, in theory. See, e.g., Times-Picayune
Publishing Co. v. United States, 345 U.S. 594, 611 (1953) ("[T]he
essence of illegality in tying agreements is the wielding of
monopolistic leverage; a seller exploits his dominant position in
one market to expand his empire into the next."). Professor Kaplow
has analyzed this danger and suggested that tying arrangements may
cause harm even when they do not create power in a second market.
Louis Kaplow, Extension of Monopoly Power through Leverage, 85 Col.
L. Rev. 515 (1985). But we need not decide on these facts whether
renting sugar cane land and grinding sugar cane constitute two
separate goods. Assuming that they do and that the lease Teche
Sugar offered therefore amounted to a tying arrangement, the
farmers have nevertheless failed to establish that the lease
violated the Sherman Act.
4
We begin with first principles. Not all tying arrangements
are illegal. Jefferson Parish Hospital District No. 2 v. Hyde, 466
U.S. 2, 24-25 (1984) ("[T]he fact that [a] case involves a required
purchase of two [goods] that would otherwise be purchased
separately does not make the . . . contract illegal.") As
Jefferson Parish explained it:
[T]he law draws a distinction between exploitation of
market power by merely enhancing the price of the tying
product, on the one hand, and by attempting to impose
restraints on competition in the market for a tied
product, on the other. When the seller's power is just
used to maximize its return in the tying product market,
where presumably its product enjoys some justifiable
advantage over its competitors, the competitive ideal of
the Sherman Act is not necessarily compromised. But if
that power is used to impair competition on the merits in
another market, a potentially inferior product may be
insulated from competitive pressures.
Id. at 14.
The legality of a tying arrangement depends in part on its
effect in the tied market. The farmers acknowledge that Teche
Sugar could have raised the rent it charged for its land, allowing
the farmers to process their sugar cane at the mill of their
choice. It is doubtful that Teche Sugar's decision to seek similar
gains by controlling the choice of mills violates the Sherman Act.2
Our focus today is, however, whether the lease impaired competition
in the sugar cane processing market such as creating barriers to
2
See, e.g., Richard Posner, Antitrust Law: An Economic
Perspective 173 (1976) (claiming that no difference exists
between profit from increase in price of tying product and
similar gains made through forcing consumer to purchase tied
product). But see Louis Kaplow, supra, at 520-25 (arguing that
method in which market power is deployed may affect extent of
harm to consumer).
5
the entry of new competitors into that market. Jefferson Parish,
466 U.S. at 14. Our analysis focuses on Teche Sugar's economic
strength in the sugar cane land and milling markets. Id. at 18("In sum, any inquiry into the validity of a tying arrangement must
focus on the market or markets in which the two products are sold,
for that is where the anticompetitive forcing has its impact.").
The farmers may prevail under either of two approaches.
First, to establish that the tying arrangement was illegal per se,
the farmers must show that Teche Sugar exerted sufficient control
over the tying market, sugar cane land, to have a likely
anticompetitive effect on the tied market, sugar cane grinding.
Id. at 15-18, 26-29. Second, the farmers may prevail by
establishing that the arrangement is an unreasonable restraint of
trade. Id. at 17-18, 29-31. See also Fortner Enters. v. United
States Steel Corp., 394 U.S. 495, 499-500 (1969) ("Fortner I"). We
evaluate the reasonableness of the arrangement by exploring the
"actual effect of the exclusive contract on competition" in both
the tying and tied markets. Jefferson Parish, 466 U.S. at 29. We
may find an antitrust violation to be an unreasonable restraint of
trade only if the tying arrangement has had an "actual adverse
effect on competition." Id. at 31.
A.
A per se condemnation requires proof that the tying
arrangement involved "the use of market power to force [consumers]
to buy [goods] they would not otherwise purchase." Id. at 26. The
per se rule, of course, obviates the need for full consideration of
6
actual market conditions; it does require a finding of "significant
market power" in the tying market. See id.The farmers allege that Teche Sugar controlled as much as
17.5% of the land in the relevant market. They base this
percentage on a narrow definition of the market of sugar cane land.
Sugar cane farmers can feasibly transport their crop for processing
no farther than twenty five to thirty five miles from their farms.
Five mills operated within approximately thirty five miles of the
land that Teche Sugar offered to farmers, an area encompassing the
St. Mary and Iberia Parishes. Teche Sugar, South Coast and related
companies controlled no more than 17.5% of the sugar cane farmland
in St. Mary Parish and no more than 9.4% of the farmland in the two
parishes combined.
The district court defined both products as the relevant
market in sugar cane land. We find that even under the narrowest
of reasonable definitions Teche Sugar lacked the requisite market
power to trigger a per se violation.
Land that offers a distinct economic advantage based on its
location may enhance market power. See Northern Pacific R. Co. v.
United States, 356 U.S. 1 (1958). But possession of 17.5%, much
less 9.4%, of a market is not normally sufficient to satisfy the
requirements of the per se rule. The Supreme Court in Jefferson
Parish, for example, found control over 30% of a tying market to
fall shy of "the kind of dominant market position that obviates the
need for further inquiry into actual competitive practices." 466
U.S. at 27. Some circuit courts have used 30% as a rough benchmark
7
for the minimum amount of market power necessary to give rise to a
per se violation of antitrust law. See Grappone, Inc. v. Subaru of
New England, Inc., 858 F.2d 792, 797 (1st Cir. 1988) (finding
insufficient market power for per se antitrust violation); Will v.
Comprehensive Accounting Corp., 776 F.2d 655, 672 (7th Cir. 1985),
cert. denied, 475 U.S. 1129 (1986) (same).3
The farmers contend that it is a mistake to gauge Teche
Sugar's market power by considering the percentage of its holdings
in the relevant land market. Sugar cane land is a rare commodity,
they argue, and as a result Teche Sugar garnered significant market
power. But it is only by defining the market for sugar cane land
narrowly that the farmers can maintain that Teche Sugar controlled
17.5% of that market. This definition of the tying market includes
only land in the St. Mary and Iberia Parishes and fully reflects
the location of the land and the requirements of sugar cane
production. All of the sugar cane grown in the parishes can be
brought to the same set of mills for processing.
The farmers also allege that leases for sugar cane land
generally span several years and that only a fraction of the sugar
3
We do not imply that a plaintiff may not provide direct
evidence of market power, obviating the need to inquire into the
percentage of the tying market that the defendant commanded. See
Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. __,
112 S.Ct. 2072, 2088 (1992) ("It is clearly reasonable to infer
that [a defendant] has market power to raise prices and drive out
completion in the after-markets, [where a plaintiff] offer[s]
evidence that [the defendant] did so."). Cf. Stephen Calkins,
Supreme Court Antitrust 1991-92: The Revenge of the Amici, 61
Antitrust L.J. 269, 301 (1993) ("The words 'per se' are
conspicuously absent from Kodak's discussion of tying.").
8
cane land in a market becomes available in a given year. As a
result, they reason, Teche Sugar exercised considerable power over
the market despite the relatively small amount of land it held. As
proof of Teche Sugar's power, the farmers note that, although some
sugar cane land was on the market, no adequate alternative land was
available when Teche Sugar offered them a lease.
Were we to accept the farmers' theory, any land owner in a
market where sales occur only periodically would possess
significant market power, and every party in control of sugar cane
land in St. Mary Parish would possess such power. As the Supreme
Court stated in U.S. Steel Corp. v. Fortner Enterprises, 429 U.S.
610 (1977) ("Fortner II"): "[T]he question is whether the seller
has some advantage not shared by his competitors in the market for
the tying product." Id. at 620 (emphasis added). See also Will,
776 F.2d at 672 (citing Fortner II). The farmers offer no reason
to believe that Teche Sugar had an advantage over its competitors
in the market for sugar cane land in St. Mary Parish. All of the
owners of sugar cane land in the parish possessed a scarce
commodity. The farmers therefore provide an inadequate basis for
the conclusion that Teche Sugar possessed sufficient power in the
tying market to trigger per se condemnation of the lease.
The cases on which the farmers rely do not require the
contrary conclusion. The Sixth Circuit's opinion in Bell v.
Cherokee Aviation Corp., 660 F.2d 1123 (6th Cir. 1981), is
representative. The defendant in Bell controlled hangar and
outdoor space at an airport. The defendant conditioned lease of
9
the space on the plaintiff's purchase of all fuel, maintenance, and
parts required to service the plaintiff's airplanes. Bell, 660
F.2d at 1125-26. The court found that the defendant possessed
sufficient power in the market for airport space, the tying market,
to render the tying arrangement a per se violation of antitrust
law. Id. at 1127-30. The court based its conclusion on the fact
that the defendant in Bell was "a dominant firm." Id. at 1129.
Moreover, the court found that the defendant was "in a uniquely
advantageous position" to sell space to a party attempting to
establish a business of the plaintiff's variety. Id. at 1128(internal quotation marks omitted). Other providers of airport
space, the court noted, did not occupy the same advantageous
position. See id. at 1128-29. The farmers in the present case
have not shown that Teche Sugar held a dominant position in the
sugar cane land market or that Teche Sugar's land conferred a
market advantage not possessed by its competitors.
Similarly, in Rosebrough Monument Co. v. Memorial Park
Cemetery Ass'n, 666 F.2d 1130 (8th Cir. 1981), the defendants
conditioned purchase of cemetery lots on the plaintiffs' purchase
from defendants of any foundation preparation necessary for the
plaintiffs' grave memorials. Id. at 1141. The defendants did not,
however, merely tie purchase of one good to another; they also
conspired to adopt a uniform tying arrangement policy in the
industry. Id. at 1136-40. The court relied on the existence of
this policy in concluding that the defendants' share of the market
conferred significant economic power. See id. at 1143
10
("[Defendants] accounted for 22 percent of the burials performed in
the market area . . ., and the exclusive foundation preparation
policy, upon which [plaintiff] bases its claim, is uniformly
followed by nearly all of the cemeteries."). See also Moore v.
Jas. H. Matthews & Co., 550 F.2d 1207 (9th Cir. 1977) (finding
antitrust violation where defendants controlled 78% of market in
cemetery plots, to which they tied installation of grave markers).
Cf. Ringtown Wilbert Vault Works v. Schuylkill Memorial Park Inc.,
650 F.Supp. 823 (E.D. Pa. 1986).
The farmers' reliance on Ware v. Trailer Mart, Inc., 623 F.2d
1150 (6th Cir. 1980), is also misplaced. The defendant in Ware
conditioned the lease of a lot in a trailer park on the purchase of
a mobile home. Ware, 623 F.2d at 1152. The court held that the
plaintiff had alleged in its complaint that the defendant possessed
significant market power and further noted that even if the
plaintiff had not made such an allegation, the omission would not
preclude consideration of the plaintiff's claim under the rule of
reason. Id. at 1153-54 (relying on Fortner I, 394 U.S. at 499).
The court did not, however, address the issue of how much power the
defendant had to possess to render the tying arrangement a per se
violation of antitrust law.
B.
The farmers nevertheless may prevail if the lease constituted
an unreasonable restraint of trade. Jefferson Parish, 466 U.S. at
29. Whether this arrangement was an unreasonable restraint of
trade requires an additional "inquiry into the actual effect of the
11
exclusive contract on competition" in the market for the tied good.
Id. We need not explore whether Teche had sufficient market power
in the market for sugar cane land, under a rule of reason test,
because the tying arrangement did not hamper competition in the
market for sugar cane grinding.
Teche Sugar not only failed to expand its presence in the
sugar cane milling market, it also failed to maintain its presence.
Teche Sugar closed the mill to which it first sent the sugar cane
that Breaux Brothers produced. Teche Sugar then directed the sugar
cane to the mill owned by its sister company, South Coast Sugars.
Despite the advantage of a guaranteed source of sugar cane, South
Coast sold its mill. The withdrawal of Teche Sugar and South Coast
from the sugar mill grinding business belies the claim that Teche
Sugar increased its power in the tied market.
Moreover, the farmers' contentions notwithstanding, Teche
Sugar's later deal with Sterling Sugar Mill posed no threat to
competition. Its terms required Teche Sugar to pay Sterling a set
price to grind the sugar cane that Breaux produced. Teche Sugar in
essence hired out a mill for a fixed fee. Produced sugar would be
sold at the market on shares with its lessee.
When a party has no control over a tied market, the dangers
usually created by a tying arrangement do not exist. See generally
9 Philip E. Areeda, Antitrust Law ¶1726a, at 331-33 (1991). Teche
Sugar had no incentive to dampen competition in the sugar milling
market. Any decrease in competition would be contrary to its
interests. Teche Sugar would have to pay any supracompetitive
12
price its interference sparked. See id. at 332. Once Teche Sugar
abandoned the business of grinding sugar, any threat that the tying
arrangement might harm competition disappeared.
Teche Sugar did not eliminate competition among mills by
directing sugar cane to its own mill. It attempted,
unsuccessfully, to survive in the sugar milling market. This
futile effort had no actual adverse effect on competition.
Jefferson Parish, 466 U.S. at 31 ("Without a showing of actual
adverse effect on competition, [the plaintiff] cannot make out a
case under the antitrust laws" in the absence of per se
liability.). As a result, there was no violation of antitrust law.
C.
As a final note, the tying arrangement held the potential to
enhance competition. The sugar cane market is volatile. When
sugar cane prices drop, farmers produce less cane. Mills have a
difficult time weathering long seasons with slack demand. Once a
period of economic duress has passed, significant costs confront
any party entering into the sugar cane grinding industry. Mills
may survive hard times by securing sources of sugar. The continued
existence of the mills may ensure that there is greater competition
when the sugar cane grinding business once again proves lucrative.
Such a procompetitive effect tends to counter the anticompetitive
tendencies of a tying arrangement and are relevant to any inquiry
into an alleged antitrust violation. See Grappone, 858 F.2d at
799-80 (reviewing this line of cases).
13
III.
The farmers complain about the lease terms Teche Sugar offered
to them. All the farmers but Breaux rejected the lease. The
problem is not, under these circumstances, a market failure.
Rather, an excess of farmers eager to rent sugar cane land put the
farmers in a vulnerable position. The farmers suffered because of
competition, not its absence. Their personal plight is
unfortunate. But competition has not been injured and the
antitrust laws offer them no relief.
REVERSED.
14