42nd Parallel North v. E Street Denim Co.

In the
United States Court of Appeals
For the Seventh Circuit
No. 01-3017
42ND PARALLEL NORTH,
Plaintiff-Appellant,
v.
E STREET DENIM COMPANY,
WESTERN GLOVE WORKS,
BUFFALO de FRANCE CORP.,
GRASS ROOTS CLOTHING CO., INC.,
and URBAN OUTFITTERS, INC.,
Defendants-Appellees.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 00 C 4090--Wayne R. Andersen, Judge.
Argued January 23, 2002--Decided February 13, 2002
Before BAUER, COFFEY, and EVANS, Circuit
Judges.
EVANS, Circuit Judge. On January 23,
2002, the same day our panel heard oral
arguments in this case, the front page of
the business section of the New York
Times reported:
The Netscape Communications Corporation,
the commercial pioneer in Web browsing
software, whose fortunes faded after a
withering assault from Microsoft, filed a
broad antitrust suit yesterday against
the company. Netscape charged that its
decline was a result of Microsoft’s
illegal tactics, echoing many of the
findings in the government’s case against
the company.
The Microsoft/Netscape (Netscape’s
corporate parent is AOL Time Warner)
brouhaha is the sort of battle one thinks
about when considering lawsuits under
federal antitrust laws. One does not
ordinarily conjure up the same sort of
images when thinking about two little
retail stores in suburban Chicago duking
it out over blue jeans and T-shirts. But
that’s what we’ve got before us on this
appeal. The district judge thought that
the tussle didn’t measure up as an
antitrust suit and he dismissed it. As we
see it, the district judge got it right,
and his dismissal of the suit is
affirmed.
We draw the facts from the amended
complaint, accepting its allegations as
true. 42nd Parallel North and E Street
Denim Company are retailers of specialty
clothing competing for the same
customers, those in the "brand driven"
and "fashion oriented" money-spending age
group of 9 to 24. Both sell their wares
in the central business district of
Highland Park, a suburb north of Chicago,
with approximately 32,000 residents; the
central business district boasts 570
retail stores, including The Gap, Banana
Republic, Saks Fifth Avenue, Eddie Bauer,
Jos. A. Bank, Ann Taylor, The Limited,
and Bath and Body Works.
After it opened for business in 1996,
42nd’s suppliers included Buffalo de
France, which manufactures and
distributes denim blue jeans and
sportswear under the trade name "Buffalo
Jeans, David Britton"; Western Glove
Works, which manufactures and distributes
denim blue jeans and sportswear under the
trade name "Silver Jeans"; and Grass
Roots Clothing, which manufactures and
distributes clothing, including fashion
T-shirts. 42nd made substantial sales of
each of these three companies’ product
lines.
42nd alleges that since that time (dates
are not really specified), E Street
threatened and coerced these
manufacturers (who are also named as
defendants) not to do business with 42nd.
Buffalo Jeans, which had been 42nd’s main
supplier, has refused to fill its orders,
claiming that the orders were lost or it
did not have the products to ship. It has
shipped only out-of-season styles or
unpopular sizes. Buffalo Jeans claimed it
was having supply problems. 42nd asserts
that Buffalo Jeans’ justifications are
false because:
E Street and other stores in the area are
filled with the same product that 42nd
has been unable to obtain. Likewise,
other retail stores throughout the United
States and in other parts of Illinois
have had little or no problems having
[their] orders filled by Buffalo Jeans or
obtaining sales and support services.
Western Glove also has refused to fill
42nd’s orders, claiming they were either
lost or not received. Noting that at some
point the owner/president of Western
Glove acknowledged that "he was under
pressure by E Street not to continue to
sell to 42nd," 42nd asserts that E
Street’s threats and coercion caused
Western Glove to stop selling to 42nd.
Grass Roots has also refused to fill
42nd’s orders; a Grass Roots
representative said that E Street "placed
pressure on it not to sell to 42nd."
42nd further asserts that beginning in
September of 1999 it has asked Urban
Outfitters (another named defendant) that
manufactures and distributes jeans and
sportswear, to fill 42nd’s orders. Urban
Outfitters has refused, citing E Street
as the reason.
42nd brought a claim under sec.sec. 4
and 16 of the Clayton Act based on a
violation of sec. 1 of the Sherman Act.
It sought damages for lost retail sales
of the products at issue, losses in the
form of markdowns caused by the shipment
of out-of-season styles and unpopular
sizes, lost sales of associated items,
and a reduction of customer goodwill. The
district judge dismissed the complaint
(and relinquished jurisdiction over a
pair of supplemental state law claims)
because 42nd had failed to allege an
anticompetitive effect on the market. We
review a ruling on a motion to dismiss de
novo. Although we have instructed
district judges to be wary of dismissing
antitrust complaints under Federal Rule
of Civil Procedure 12(b)(6), see Car
Carriers, Inc. v. Ford Motor Co., 745
F.2d 1101, 1106-07 (7th Cir. 1984), the
district judge here acted properly as
this suit is a nonstarter.
Section 1 of the Sherman Act proscribes
"[e]very contract, combination in the
form of trust or otherwise, or
conspiracy, in restraint of trade or
commerce among the several States, or
with foreign nations." 15 U.S.C. sec. 1.
Our starting point is Business
Electronics Corp. v. Sharp Electronics
Corp., 485 U.S. 717 (1988). In Sharp, a
manufacturer of electronic calculators
terminated one dealer in response to
another dealer’s complaints about the
first dealer’s price-cutting habits. The
shunned dealer sued the manufacturer,
claiming an antitrust violation. The
Court noted that any conspiracy to
terminate the dealer constituted a
vertical and not a horizontal restraint
because it involved an agreement between
participants at different levels of
distribution. Id. at 730 n.4. Moreover,
because the restraint did not involve an
agreement on prices, it was not per se
illegal but rather subject to a Rule of
Reason analysis. Id. at 735-36. The Court
declined to adopt a per se prohibition,
noting that a retailer’s ability to
exploit an increase in intrabrand market
power is limited by the presence of
interbrand competition. Id. at 725.
Moreover, vertical nonprice restraints
give dealers an incentive to promote a
manufacturer’s products and invest in
providing corollary services, and thus
have the potential to stimulate
interbrand competition. Id. at 724-25.
The Rule of Reason analysis weighs these
possible effects and requires a plaintiff
to show that the challenged restraint has
adversely impacted competition in the
relevant market. A-Abart Elec. Supply,
Inc. v. Emerson Elec. Co., 956 F.2d 1399,
1402-03 (7th Cir. 1992) (citation
omitted); Havoco of Am., Ltd. v. Shell
Oil Co., 626 F.2d 549, 554-56 (7th Cir.
1980). The defendants argue that there
are problems with how 42nd defined the
relevant market in this case, but the
district judge did not find that ground
fatal and, for a moment or two, we will
follow his lead. We will assume that the
relevant market consists of the designer
jeans (made by Buffalo Jeans, Western
Glove, and Urban Outfitters) and fashion
T-shirts (made by Grass Roots) sold in
Highland Park’s central business
district. To determine whether
defendants’ conduct has unreasonably
restrained competition in that market, we
consider the challenged restraint’s
effects on both intrabrand and interbrand
competition. Valley Liquors, Inc. v.
Renfield Importers, Ltd., 678 F.2d 742,
745 (7th Cir. 1982) ("Valley I"). Because
measuring and balancing these effects can
be difficult, this circuit has adopted a
threshold requirement, a "shortcut" as it
were, that the plaintiff needs to show
that the defendant has market power. Id.
A company has market power if it can
raise prices above a competitive level
without losing its business. Valley
Liquors, Inc. v. Renfield Importers,
Ltd., 822 F.2d 656, 666-68 (7th Cir.
1987) ("Valley II").
But, in this case, a question arises:
Which defendant? There are four
manufacturers and one retailer named, so
42nd’s theory of anticompetitive effects
could depend on market power at either of
two levels. When a manufacturer possesses
market power, a decision to terminate a
dealer threatens to have an
anticompetitive effect on the relevant
market because consumers cannot turn to
other product brands when intrabrand
competition is diminished. Cf. Valley I,
678 F.2d at 745. But no such threat is
raised here. There are no allegations
that any of the manufacturer-defendants
have market power in the central business
district of Highland Park; the presence
of at least the three named manufacturers
of designer jeans suggests otherwise. Nor
is there any indication that Grass Roots
works the fashion T-Shirt corner alone.
42nd also does not assert that the
manufacturers have conspired with one
another, thereby leveraging their
individual market shares into market
power. Quite simply, the amended
complaint indicates that the
manufacturer-defendants sell their own
brands, which compete with others.
The amended complaint appears to depend
on the specter of retail market power. If
E Street, a multibrand retailer,
possesses market power in retailing the
competing product lines of designer jeans
and fashion T-shirts in Highland park,
then it can reduce both intrabrand and
interbrand competition by pressuring
manufacturers not to deal with other
retailers. But 42nd nowhere alleges that
E Street has such market power. It
instead asserts that E Street has
eliminated 42nd as a price competitor.
Antitrust laws protect competition and
not competitors, Brown Shoe Co. v. United
States, 370 U.S. 294, 320 (1962); see
also Car Carriers, 745 F.2d at 1109
(noting that "it is the function of sec.
1 to compensate the unfortunate only when
their demise is accompanied by a
generalized injury to the market"), and
although 42nd alleges that it can no
longer compete with E Street over the
jeans and T-shirts at issue, it gives no
indication that others cannot. 42nd does
not allege that E Street and 42nd were
the main rivals selling designer jeans
and T-shirts in Highland Park or that
they were even particularly important
ones. Nor are there allegations regarding
either store’s market share during the
relevant time period. Competition among
retailers in Highland Park may well be
thriving, as the complaint itself
suggests with regard to Buffalo Jeans: "E
Street and other stores in the area are
filled with the same product that 42nd
has been unable to obtain" (italics
added). 42nd argues that the district
judge misread this allegation and claims
that it really meant that only stores
outside the relevant market stock Buffalo
Jeans. The district judge did not err by
relying on the words of the complaint.
42nd next argues that market power is
inferable from the fact that E Street
raised its prices for the products after
coercing the manufacturers. But this
allegation is incomplete. Just because a
retailer raises prices doesn’t mean
competition has been harmed. The key
inquiry in a market power analysis is
whether the defendant has the "ability to
raise prices without losing its
business," Valley II, 822 F.2d at 668,
and there are no allegations, direct or
inferable, that E Street can do so. As we
noted, there may well be other competing
stores to which consumers can turn.
We also cannot close our eyes to the
fact that 42nd’s proposed geographic
market is absurdly small. See Car
Carriers, 745 F.2d at 1110 ("In
considering a motion to dismiss, the
court is not required to don blinders and
to ignore commercial reality."). The
central business district of Highland
Park--not even the whole of Highland
Park!--would have to be something of a
consumer’s black hole for us to think
that trendy shoppers wanting better
prices on designer jeans and T-Shirts
could not venture to other commercial
areas to find them. It doesn’t take a
cartographer to know that Highland Park
is located in the densely populated north
shore suburbs of Chicago, nor does it
take a market researcher to know that
"Chicagoland" is home to many shopping
venues where consumers could find
designer jeans and T-shirts. By any
sensible awareness of commercial reality,
42nd was swimming in a much larger
competitive sea than the complaint lets
on.
As the district judge said, this suit
concerns a "competitive battle between
two little shops in Highland Park," and
although the amended complaint alleges
that 42nd was spurned, at E Street’s
behest, by four manufacturers, there is
no indication that the larger romance
between the young public and its designer
jeans and T-shirts was in any way
affected. The judgment of the district
court dismissing 42nd’s amended complaint
is AFFIRMED.