Felder's Collision Parts, Inc. v. All Star Advertising Agency, Inc.

Case: 14-30410 Document: 00512915780 Page: 1 Date Filed: 01/27/2015
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
No. 14-30410 FILED
January 27, 2015
Lyle W. Cayce
FELDER’S COLLISION PARTS, INCORPORATED, Clerk
Plaintiff - Appellant
v.
ALL STAR ADVERTISING AGENCY, INCORPORATED; ALL STAR
CHEVROLET NORTH, L.L.C.; ALL STAR CHEVROLET, INCORPORATED;
GENERAL MOTORS, L.L.C.,
Defendants - Appellees
Appeal from the United States District Court
for the Middle District of Louisiana
Before KING, JOLLY, and COSTA, Circuit Judges.
GREGG COSTA, Circuit Judge:
It would not be an antitrust opinion without the line that the antitrust
laws were designed for “the protection of competition, not competitors.” Brown
Shoe Co. v. United States, 370 U.S. 294, 320 (1962). Though often included by
rote, the axiom is particularly apt in this case.
The competitors are Felder’s Collision Parts, Inc., a Louisiana dealer of
aftermarket auto body parts that are compatible with General Motors vehicles
but not manufactured by GM, and All Star, a dealer of GM-manufactured
parts. Felder’s filed this antitrust suit against All Star and GM alleging that
GM’s “Bump the Competition” program is an unlawful predatory pricing
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scheme. The program lowers the consumer price for GM-manufactured parts
below the prices of equivalent “generic” auto parts manufactured by others. It
does so by providing rebates to dealers like All Star that sell GM-manufactured
parts for the reduced prices. The rebates ensure that the dealers still make a
profit on these sales despite the lower price charged consumers.
The primary issue in this appeal from a dismissal of the antitrust claims
is whether we consider the effect of this rebate in deciding whether Felder’s
can meet one of the essential elements of a predatory pricing claim: that the
defendant is selling its product at a price below average variable cost. See
Brooke Grp. Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 224
(1993); Stearns Airport Equip. Co., Inc. v. FMC Corp., 170 F.3d 518, 532 (5th
Cir. 1999).
I.
There are two types of automobile parts. 1 Original equipment
manufacturer (OEM) parts are produced by the same manufacturer that
created the vehicle, in this case GM, or by a submanufacturer; these parts are
considered “name brand.” Aftermarket equivalent parts are non-name brand
and are produced by a supplier other than the vehicle manufacturer. OEM
parts and their aftermarket equivalents are interchangeable. But not all parts
have an aftermarket counterpart; for certain parts, the only option is to
purchase an OEM part. For the collision parts that are the subject of this case,
OEM parts make up about 80% of the market. As is typical for generic
products, aftermarket equivalents historically have enjoyed a significant price
advantage over their brand-name counterparts. Prior to the pricing program
1 This section comes from the First Amended Complaint, which details the challenged
GM plan and also includes attached exhibits obtained from GM and All Star through
discovery.
2
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at issue in this case, OEM collision parts were often priced 25% to 50% higher
than aftermarket equivalents.
Motivated by the cost-conscious insurance companies that are the
primary purchasers of auto body parts, GM instituted a program in 2009 to
eliminate its historic price disadvantage and offer “highly competitive pricing”
with aftermarket equivalents. The program, transparently named “Bump the
Competition,” is available only for GM parts that have an aftermarket
equivalent; prices remain the same for parts with no aftermarket equivalents.
A “GM Collision Conquest Calculator” determines prices. The calculator
provides a dealer of OEM parts with the “bottom line price” at which they
should sell the part. This price is 33% less than the prevailing market price
for an aftermarket equivalent. That “bottom line price” is also below GM’s list
price—the price All Star and other dealers pay GM for the part on the front
end. But after a dealer sells a highly discounted part under the program, it is
entitled to a rebate from GM. The rebate compensates the dealer for the
difference between the sale price and the price it paid GM for the part. On top
of making up for that loss, GM also pays the dealer a 14% profit based on the
part’s original price.
An example from the complaint illustrates how the program works. 2
Prior to Bump the Competition, a dealer would have purchased a part from
GM for $135.01. It would have then sold the part to a customer—usually a
collision center or body shop—for $228.83, which is more than 30% above the
$179 price for an aftermarket equivalent part.
Under Bump the Competition, a dealer like All Star would still pay an
initial purchase price of $135.01 from GM. It would then sell the part for
2 Although Bump the Competition has been in existence since 2009, the examples
Felder’s provides in the complaint are not based on actual sales or transactions.
3
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$119.93, 33% less than the market price for an aftermarket equivalent
($179 * .67). This sale price would also be about $15 less than the $135.01 the
dealer had initially paid GM for the part. By submitting the rebate, however,
the dealer would get back this $15 “loss” and would also receive a 14% profit,
which for this part would be about $18.90 ($135.01 * .14).
Felder’s filed this suit alleging that Bump the Competition is a predatory
pricing scheme that violates federal and Louisiana antitrust laws as well as
other Louisiana laws. 3 Established in 1993, Felder’s is a seller of aftermarket
equivalent collision parts based in Louisiana. It sells the parts to various
customers including collision centers and body shops. The suit names All Star,
GM, and 25 unnamed dealers of OEM parts as defendants. All Star’s OEM
parts distribution center opened in 2003 and is now the largest parts
distribution center in Louisiana. It has $5 million in inventory and more than
50,000 square feet of space. All Star and John Doe Defendants 1-25 4 compete
with Felder’s to sell GM-compatible collision parts.
The district court denied Defendants’ first motion to dismiss but raised
a number of concerns with Felder’s complaint that the court instructed Felder’s
to address in its amended complaint. On the issue of below-cost pricing, the
district court found that Felder’s failure to incorporate the rebate into All
Star’s price improperly dissected the transaction into pieces rather than
treating it as a whole. In hopes that more information would help cure these
defects, the district court also compelled Defendants to turn over documents
3 The state claims are for violations of the Louisiana antitrust laws, the Louisiana
Unfair Trade Practices Act, as well as a conspiracy claim for joint and solidary liability
pursuant to Louisiana Civil Code article 2324.
4 Felder’s sued General Motors; All Star Automotive Group, which includes All Star
Advertising Agency, Inc., All Star Chevrolet, Inc., and All Star Chevrolet North, L.L.C.; and
25 John Doe Defendants. For clarity, the All Star and John Doe Defendants are collectively
referred to as All Star.
4
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relevant to their costs and profits. With this information, Felder’s amended its
complaint. Defendants again moved to dismiss for failure to state a claim,
asserting that the complaint lacked facts to support the alleged geographic
market, below-cost pricing, and recoupment. The district court dismissed the
federal antitrust claims, citing Felder’s failure to adequately define the
relevant geographic market and its earlier finding that Felder’s did not allege
below-cost pricing. The resolution of the federal claims also warranted
dismissal of the state law antitrust claims, which depend on a finding of federal
antitrust liability. See S. Tool & Supply, Inc. v. Beerman Precision, Inc., 862
So. 2d 271, 278 (La. App. 4 Cir. 11/26/03) (“Because [the Louisiana antitrust
statutes] track almost verbatim Sections 1 and 2 of the Sherman Act,
Louisiana courts have turned to the federal jurisprudence analyzing those
parallel federal provisions for guidance.”). 5 We therefore need analyze only
whether Felder’s has stated a claim for predatory pricing under the Sherman
Act.
II.
Predatory pricing occurs when a defendant “sacrifice[s] present revenues
for the purpose of driving [a competitor] out of the market with the hope of
recouping the losses through subsequent higher prices.” Int’l Air Indus., Inc.
v. Am. Excelsior Co., 517 F.2d 714, 723 (5th Cir. 1975). Most courts analyze
predatory pricing claims as “an attempt by the defendant to preserve or extend
its monopoly power” under section 2 of the Sherman Act. IIIA PHILLIP E.
AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW ¶ 724, at 36 (3d ed. 2008).
That points to an unusual feature of this case. It is unclear which defendant
And failure to plead a state or federal antitrust conspiracy required dismissal of the
5
remaining solidary liability claim under Louisiana law.
5
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is alleged to be the attempted monopolist or if they both are. 6 The typical
predatory pricing case is brought solely against the plaintiff’s competitor who
is allegedly selling at low prices in order to increase market share by driving
the plaintiff out of the market. See, e.g., Stearns, 170 F.3d 518 (suit brought
by manufacturer of airplane jet bridges against competitor alleging
exclusionary manipulation of municipal bids and predatory pricing); Stitt
Spark Plug Co. v. Champion Spark Plug Co., 840 F.2d 1253 (5th Cir. 1988)
(suit brought by spark plug company against other spark plug company
alleging anticompetitive practices including predatory pricing); Adjusters
Replace-A-Car, Inc. v. Agency Rent-A-Car, Inc., 735 F.2d 884 (5th Cir. 1984)
(suit by rental car company accusing competitor of employing predatory pricing
in two cities in attempt to monopolize). All Star is Felder’s competitor in the
sale of collision parts at the dealer level in the supply chain. But Felder’s also
sued All Star’s supplier, GM, and pursues conspiracy claims. GM is the moving
force behind the challenged conduct, as Bump the Competition is its program.
And the only specific allegations of market share in the complaint also target
GM, mentioning its 80% share of the market for certain types of replacement
parts for GM vehicles. Indeed, it would seem that a successful predatory
6 The Automotive Body Parts Association filed an amicus curiae raising the issue of
monopoly leveraging in which a monopolist—in this case, GM—is able to leverage profits
from goods on which it holds a monopoly to cover losses arising from the below-cost sale of
another good for which it does not have a monopoly. The amicus argues primarily that the
use of average variable cost as the “appropriate measure” may be erroneous, stating that
“where a monopolistic leverage is used to decrease a predator’s overall costs, courts ought to
consider those fixed costs which are being covered by the illegal leverage.” Amicus Br. at 7
(quoting David M. Magness, Comment, Getting Past Summary Judgment in Predatory
Pricing Cases After American Airlines: Will Post-Chicago Analysis Ever Prevail?, 5 HOUS.
BUS. & TAX L.J. 421, 449 (2005)). The amicus, however, is “limited to the issue of pricing and
costs and the effect that timing and monopoly leveraging may have on whether costs are
classified as fixed or variable in the determination of appropriate measure of cost and
variable cost.” Id. at 13. It does not characterize Felder’s claims as one for monopoly
leveraging, and Felder’s does not raise this claim and its complaint does not allege that GM
prices below any measure of costs.
6
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pricing scheme of this nature would primarily benefit GM by driving
aftermarket equivalent parts from the market. But Felder’s has never alleged
that GM is selling parts below its costs, focusing instead on allegations that
GM dealer All Star is selling parts at prices below its costs. The viability of
Felder’s claims thus turns on whether it can show that All Star is engaged in
predatory pricing at the dealer level.
Although there is no heightened pleading standard in an antitrust case,
see Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007), we are wary of
predatory pricing allegations as “mistaken inferences in [predatory pricing]
cases . . . are especially costly, because they chill the very conduct the antitrust
laws are designed to protect.” Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio
Corp., 475 U.S. 574, 594 (1986); see also Stearns, 170 F.3d at 527 (“The
Supreme Court has expressed extreme skepticism of predatory pricing
claims.”). To ensure that antitrust liability is not imposed for conduct resulting
in lower prices today but carrying no viable risk of supracompetitive pricing in
the future, a plaintiff must prove two things. First, it must show that “the
prices complained of are below an appropriate measure of its rival’s costs.”
Brooke Grp., 509 U.S. at 222 (1993). Second, it must show that the defendant
has “a dangerous probability[] of recouping its investment in below-cost
prices.” Id. at 224; see also Am. Academic Suppliers, Inc. v. Beckley-Cardy Inc.,
922 F.2d 1317, 1319 (7th Cir. 1991) (“Consumers like lower prices. The
plaintiff must therefore show that the defendant’s lower prices today presage
higher, monopolistic prices tomorrow.”). We focus our analysis on the first
requirement, given that it was one of the grounds on which the district court
dismissed the case.
Low prices benefit consumers and are usually the product of the
competitive marketplace that the antitrust laws are aimed at promoting.
Brooke Grp., 509 U.S. at 223 (“Low prices benefit consumers regardless of how
7
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those prices are set, and so long as they are above predatory levels, they do not
threaten competition.” (quoting Atl. Richfield Co. v. USA Petroleum Co., 495
U.S. 328, 340 (1990)). The Supreme Court has thus emphasized that a
predatory pricing claim should go forward only when the defendant is pricing
below its costs because “the exclusionary effect of prices above a relevant
measure of cost either reflects the lower cost structure of the alleged predator,
and so represents competition on the merits, or is beyond the practical ability
of a judicial tribunal to control without courting intolerable risks of chilling
legitimate price-cutting.” Brooke Grp., 509 U.S. at 223 (citing AREEDA &
HOVEKNKAMP ¶¶ 714.2, 714.3).
The “appropriate measure” of cost has been the subject of much scholarly
and judicial debate. See Cargill, Inc. v. Monfort of Colo., Inc., 479 U.S. 104,
117 n.12 (1986) (citing cases and articles discussing various measures of cost).
The debate is settled in our court, however, as we use average variable cost.
Stearns, 170 F.3d at 532. Our practice follows the landmark 1975 article
Predatory Pricing and Related Practices under Section 2 of the Sherman Act,
in which Professors Phillip Areeda and Donald F. Turner explained why
“marginal-cost pricing is the economically sound division between acceptable,
competitive behavior and ‘below-cost’ predation.” 7 88 HARV. L. REV. 697, 716.
Although marginal cost should theoretically serve as the dividing line, the
7 They provided the following explanation for why marginal cost is the best measure:
“Under conditions of perfect competition, a firm always maximizes profits (or minimizes
losses) by producing that output at which its marginal cost equals the market price.” 88
HARV. L. REV. at 702. Because rational firms attempt to maximize profits or minimize losses,
a firm selling at a “shortrun profit-maximizing (or loss-minimizing) price is clearly not a
predator.” Id. at 703. On the other hand, “a firm producing at an output where marginal
cost exceeds price is selling at least part of that output at an out-of-pocket loss.” Id. at 712.
“A monopolist pricing below marginal cost should be presumed to have engaged in a
predatory or exclusionary practice” because “[t]he monopolist is not only incurring private
losses but wasting social resources when marginal costs exceed the value of what is produced.
And pricing below marginal cost greatly increases the possibility that rivalry will be
extinguished or prevented for reasons unrelated to the efficiency of the monopolist.” Id.
8
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article also notes that businesses rarely account for marginal cost on their
books. Id. at 716. Average variable cost, which is more commonly accounted
for, is thus a suitable “surrogate.” Id. at 716–18; accord AREEDA &
HOVENKAMP, supra ¶ 724, at 39.
Even calculating average variable cost can be time-consuming and
challenging in many cases. See Stearns, 170 F.3d at 532–35 & 533 n.14
(discounting the plaintiff’s expert because he “relied on an erroneous
interpretation of the law regarding predatory pricing” by failing to mention
average variable cost and did not “explain what [general and administrative
expenses] represented or state that it was a variable cost”). Variable costs
include “inputs like hourly labor, the cost of materials, transport, and electrical
consumption at a plant.” Id. at 532. But that complicated inquiry of defining
the proper inputs does not arise here because Felder’s acknowledges that its
ability to show pricing below average variable cost turns on a single issue that
the district court termed the “temporal debate”: should the calculation account
for the rebate that All Star receives from GM?
If the rebate were irrelevant as Felder’s contends, then Felder’s
complaint would be sufficient on this issue because it alleges that “at the point
of sale to body shops and collision centers, the All Star Defendants and the
John Doe Defendants 1-25 sell collision parts lower than their average variable
cost” and that “at the time of sale, the price of the good sold was less than the
cost to All Star Defendants or the John Doe Defendants plus the costs of selling
that part.” The example it gives, which was described above, illustrates the
basis for this contention: “At the point of sale”—that is, without taking into
account the rebate it later receives—All Star would sell a part for $119.93 that
it purchased from GM for $135.01.
9
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The calculus is quite different if the rebate is considered. After the
rebate, that $15 loss turns into a $19 profit. 8 The district court thought it
appropriate to consider the rebate because to “find that the relevant sales by
All Star are below-cost ignores the commercial realities of the transaction—
specifically the fact that All Star probably would not sell at the suggested
‘bottom-line’ price absent GM’s claim system, which allows for collection of the
difference between the sales price and dealer cost, plus a 14 percent profit.”
Felder’s Collision Parts, Inc. v. Gen. Motors Co., 960 F. Supp. 2d 617, 635–36
(M.D. La. 2013).
Felder’s main challenge to the district court’s analysis is to argue that it
improperly added the rebate amount to the price at which All Star sold the
parts to its customers. In predatory pricing cases, Felder’s contends, what
matters for the “price” side of the equation is the price at which a product is
sold in the relevant market. This argument misses the mark. For starters, we
do not read the district court opinion as adding the rebate amount to All Star’s
sales price. Instead, it concluded that “the cost and revenue associated with a
particular sale should not be dissected into pieces, but rather treated as a
whole, regardless of the time associated with any discount or rebate
programs.” 9 Id. at 635 (citing Stearns, 170 F.3d at 533 n.15 (“[T]he fact that
[the defendant] may have chosen for internal reasons or salesmanship
8 Felder’s allegations seem to limit All Star’s costs to the purchase price of the parts
from GM, without including other potentially variable costs for each unit of sale. Notably,
however, Felder’s assumes that All Star is making a profit on each sale after the rebate is
included. And at the Rule 12 stage, we review only the allegations that a plaintiff makes; we
cannot speculate about costs it may have missed. There is no allegation that All Star is
pricing below average variable cost if the rebate is considered.
9 Felder’s may have gotten this impression from the district court’s discussion of
rebate cases, which the district court read for the proposition that “price is measured after
considering any discounts or rebates.” Id. at 635 (citing A.A. Poultry Farms, Inc. v. Rose Acre
Farms, Inc., 881 F.2d 1396, 1407 (7th Cir. 1989)). As discussed below, All Star is receiving
the rebate as a purchaser of parts from GM, so it makes the most sense to read the district
court’s opinion as viewing the rebate as a reduction in the cost of acquiring the parts.
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purposes to shift costs in this manner is not objectionable without a showing
that the project as a whole was not priced above its variable cost.”)). We turn
then to that fundamental question: not the side of the ledger on which the
rebate should be placed, but whether it should be considered at all.
We agree with the district court that the rebate should be considered in
the predatory pricing analysis. The price versus cost comparison focuses on
whether the money flowing in for a particular transaction exceeds the money
flowing out. The rebate undoubtedly affects that bottom line for All Star by
guaranteeing that it makes a profit on any Bump the Competition sale. That
undisputed fact resolves the case, as a “firm that is selling at a shortrun profit-
maximizing (or loss-minimizing) price is clearly not a predator.” Areeda &
Turner, 88 HARV. L. REV at 703.
Felder’s “freeze frame” approach of comparing price and cost as they
exist only on the day of the sale ignores the economic realities that govern
antitrust analysis. See United States v. Concentrated Phosphate Exp. Ass’n,
393 U.S. 199, 209 (1968) (“In interpreting the antitrust laws, . . . [w]e must
look at the economic reality of the relevant transactions.”); Sec. Tire & Rubber
Co. v. Gates Rubber Co., 598 F.2d 962, 965–66 (5th Cir. 1979) (“There usually
is no substitute for a careful analysis of the economic realities presented by the
facts of a given case in light of the underlying purpose of the relevant antitrust
statute.”). Although All Star’s profitability is what ultimately matters, it
makes sense conceptually to view the rebate as a reduction in All Star’s cost of
purchasing the parts from GM. In purchasing the parts from GM, All Star is
a consumer. As it does for any consumer, a rebate reduces All Star’s cost of
acquiring the parts. So although All Star would initially pay $135.01 for the
example part, the rebate would reduce the price to $101.03.
Felder’s conceded at oral argument that if GM had sold the part to All
Star at this lower price up front, then Felder’s would have no case. The
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concession was an obvious one because in that scenario, All Star would be
selling the part for more than the $101.13 it would have paid GM (and recall
that there is no allegation that GM’s price is below its average variable cost).
Different timing does not change that analysis. A firm’s costs related to a
transaction are not set in stone on the day of the sale. See Fruitvale Canning
Co., 52 F.T.C. 1504, 1520 (1956) (“It is the actual amount paid by the purchaser
to the seller after taking into consideration all discounts, rebates, or other
allowances with which we are concerned here.”), cited in A.A. Poultry, 881 F.2d
at 1407.
Any consumer would consider a rebate as a reduction in cost, even if the
consumer were “refunded” months after the actual sale for the higher price.
Just ask the purchaser of a new “$600” cellphone for which a $300 rebate were
available. Perhaps Felder’s position in this case stems from the extra step in
the transaction; All Star gets a rebate from GM on a product that All Star
passes on to its consumers. But any confusion resulting from that extra step
is eliminated by considering an example involving a different cost input: If All
Star received a rebate on the costs of shipping the collision parts, is there any
doubt that rebate would reduce its shipping costs even though the discount
would not be realized the day the shipping would take place? An analogy used
in a prior predatory pricing case also supports rejecting Felder’s isolated view
of the transaction. We have noted that when “a company has a ‘buy one, get
one free’ promotion, it would be incorrect to look at the nominal price of the
‘free’ product—zero—and infer predation from this fact.” Stearns, 170 F.3d at
533 n.15. The economic reality in that situation is that the two products are
both being sold at a 50% discount. The undisputed reality in this case is that
All Star is making money on its sale of parts after it receives the GM rebate.
And with respect to GM, Felder’s does not allege that it is selling its parts
below average variable cost, whether the rebate is considered or not.
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Although it has remained in business during the five years in which
Bump the Competition has been in effect, 10 Felder’s no doubt is having a
tougher time selling aftermarket equivalent parts for GM vehicles in light of
GM’s decision to reduce the price of its parts at the dealer level by large
percentages (almost a 50% reduction from $228.33 to $119.93 for the example
part). But antitrust law welcomes those lower prices for consumers of collision
parts so long as neither GM nor its dealers is selling parts at below-cost levels.
See Matsushita, 475 U.S. at 594 (“[C]utting prices in order to increase business
often is the very essence of competition.”). Because the district court properly
concluded that the rebate GM provides its dealers should be considered in
making that determination, its judgment is AFFIRMED.
10Felder’s makes no mention of whether it sells parts other than GM-equivalent parts,
which is relevant to whether Felder’s can stay in business in spite of All Star’s lower prices.