Franchise Antitrust Claims Dismissed in Face of Defects in Pleading Antitrust Conspiracy
By: Jeffrey M. Goldstein
Goldstein Law Firm, PLLC
(202) 293 3047
Insulate SB v. Advanced Finishing Systems, Inc., 2015 WL 4760287, United States Court of Appeals, Eighth Circuit, Aug. 13, 2015.
Another franchise antitrust conspiracy claim smothered early in the case. This franchise antitrust putative class action suit involved claims by a purchaser of fast-set foam spray equipment against its manufacturer, the manufacturer’s subsidiary, and numerous distributors, including conspiracy in restraint of trade, conspiracy to acquire monopoly power, use of exclusionary contracts to lessen competition, and violations state consumer protection laws. The defendants moved to dismiss, and the motion was granted by the United States District Court for the District of Minnesota. In turn, the purchaser appealed to the United States Court of Appeals for the Eighth Circuit, which confirmed the lower court ruling.
The facts of the case are as follows. Insulate SB, Inc. (Insulate), a purchaser of fast-set spray foam equipment (FSE), filed an antitrust class action alleging that FSE manufacturer Graco Inc. and its subsidiary Graco Minnesota Inc. (Graco) and a number of FSE distributors (Distributors) (collectively, appellees) conspired to restrain trade in violation of federal antitrust law, and numerous state antitrust and consumer protection laws. Insulate claimed that these anticompetitive conspiracies kept Graco’s competitors out of the market, allowing Graco and the Distributors to charge artificially high prices.
Graco manufactured FSE and sold it to distributors, who then resold FSE on the open market to consumers like Insulate. Because there was no direct market for FSE, distributors were crucial to enabling its sales. Insulate purchased FSE from defendant distributor Intech Equipment & Supply, L.L.C. (Intech) and claimed that Graco’s anticompetitive practices forced it to pay artificially high prices.
In 2005, Graco purchased a competing FSE manufacturer, Gusmer Corp. (Gusmer), thus achieving a total 65% share of the North American FSE market, and in 2008, Graco purchased competitor GlasCraft, Inc. (GlasCraft), raising Graco’s market share “to above 90%.” Insulate also claimed that at some point “Graco agreed with its Distributors individually and collectively to enter into exclusive dealing arrangements for the purpose of keeping new and potential entrants out of the FSE market.” Insulate further alleged that “key Distributors” assisted Graco in advancing its anticompetitive scheme. In October 2007, Graco sent a letter to its distributors citing the “best efforts” clause in its distributor agreements and expressing its preference that distributors refrain from adding non-Graco products. The letter stated:
It is our opinion that taking on an additional competitive product line may significantly reduce the “best efforts” of a Graco distributor to sell our Graco and Gusmer product lines. Graco realizes that a business owner must make independent decisions regarding product lines competitive to Graco and Gusmer product offerings …. Should a distributor add a competitive product line, it will result in an immediate review of our business relationship and may impact access to specific products, changes in addendum status or possible elimination of our distributor agreement …. This position has been adopted by us unilaterally.
Insulate specifically alleged that these exclusionary distributor agreements kept a potential competitor — Gama Machinery USA, Inc. (Gama) — from entering the FSE market. In January 2009, Foampak, Inc. (Foampak) — a Graco distributor not named as a defendant—considered carrying Gama products but chose not to after Graco executives met with Foampak’s president and threatened to end its distributorship. “Considering it a better decision for its business, Foampak acquiesced.” Further, in February 2012, Graco sent a letter to its distributors “reminding” them to not carry Gama products. Insulate alleged the exclusive dealing agreements enabled and allowed Distributors to “charge Contractors anticompetitive prices for [FSE] and control geographic distribution areas and exclude new distributors from such areas.”
In March 2008, Graco sued Gama alleging, inter alia, theft of trade secrets; Gama counterclaimed alleging, inter alia, Graco had unilaterally monopolized the FSE market in violation of Sherman Act. In 2013, the United States Federal Trade Commission (FTC) also prepared a complaint against Graco accusing Graco of unlawfully acquiring its competitors in violation of Clayton Act Section 7 (unlawful merger activity); however, before the case was litigated, Graco and the FTC entered into a consent agreement that confirmed Graco would not engage in any practice “that has the purpose or effect of achieving Exclusivity with any Distributor.” The consent agreement included language stating that Graco did not admit that the law had been violated.
On June 14, 2013, after learning of the FTC complaint, Insulate filed the instant lawsuit. Insulate claimed Graco and a collection of FSE distributors, through “agreements in restraint of trade,” conspired to reduce competition in violation of the Sherman Act, the Clayton Act, and numerous states’ antitrust and consumer protection laws. The United States District Court granted the appellees’ motions to dismiss, finding, in general, that Insulate had failed to state a claim substantively and procedurally.
On appeal, with regard to the federal antitrust claims, the Eighth Circuit predictably focused initially on the plaintiff’s ability to demonstrate that it had antitrust standing to bring the case. According to the Court, “[T]he focus of the doctrine of ‘antitrust standing’ is somewhat different from that of standing as a constitutional doctrine.” Noting that the doctrine of antitrust standing is more rigorous than the constitutional aspect of standing, the Court set out the prolifically cited concept that “a private plaintiff must demonstrate that he has suffered an ‘antitrust injury’ as a result of the alleged conduct of the defendants,” and that “An “antitrust injury” is an “injury of the type the antitrust laws were intended to prevent … that flows from that which makes defendants’ acts unlawful.” The concept of antitrust standing is frequently interpreted as a negative, such that “a remote or ‘indirect’ purchaser was not a person injured” under federal antitrust law.”
Applying the antitrust standing doctrine to the case, the defendants claimed that Insulate, as an indirect purchaser of FSE (since it purchased through distributors), lacked standing to bring its antitrust claims. The Court replied by noting that “Our court has suggested that indirect purchasers may bring an antitrust claim if they allege the direct purchasers (here, the distributors) are “party to the antitrust violation” and join the direct purchasers as defendants.” Going beyond the suggestion, the Eighth Circuit stated that “We now hold as much.” Specifically, the Court explained that “Because Insulate’s complaint alleges conspiracies between Graco and the Distributors and names the Distributors as defendants, Insulate has adequately established it has antitrust standing.”
Next, the Court, after holding that antitrust standing existed, examined the question whether the plaintiff had adequately stated a claim under the Federal Rules of Civil Procedure. “[A] plaintiff’s obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” The Court proceeded to explain why the standards for evaluating an antitrust claim were relatively rigorous, stating that “Given “the unusually high cost of discovery in antitrust cases … the limited ‘success of judicial supervision in checking discovery abuse [,]’ and ‘the threat [that] discovery expense will push cost-conscious defendants to settle even anemic cases …,’ the federal courts have been reasonably aggressive in weeding out meritless antitrust claims at the pleading stage.”
On appeal, Insulate challenged the district court’s dismissal of the three federal antitrust claims, which included the following: (1) a conspiracy to restrain trade through the use of exclusionary agreements in violation of Sherman Act Section 1; (2) an “attempt and conspiracy to” “acquire, maintain, and enhance Graco’s monopoly power” in violation of Sherman Act Section 2; and (3) the “use of exclusionary contracts to substantially lessen competition” in violation of Clayton Act Section. After listing these claims, the Court accurately noted that “the critical element of each claim is concerted action—i.e., the existence of a contract or conspiracy.” This, according to the Court, was crucial, as “[T]o satisfy the concerted action requirement, the plaintiff must demonstrate that the defendants shared a ‘unity of purpose or a common design and understanding, or a meeting of the minds.” As the Court explained, it is insufficient for an antitrust plaintiff to allege merely “parallel conduct” to demonstrate an antitrust conspiracy.
Although the Court stated that the necessary concerted action could be met by an implied, as well as an explicit, agreement, it incredibly, after reviewing the plaintiff’s complaint, found that “Insulate has not pled “enough factual matter (taken as true) to suggest that an agreement was made.”
With respect to the written exclusivity agreements, Insulate argued that the “Appellees entered into written exclusive dealing contracts” that are “ ‘sufficient to establish a contract or conspiracy for the purposes of … exclusive dealing claims.’ The Court, however, responded that “The complaint does not support this argument.” Noting that “Insulate appears to rely on Graco’s 2007 letter as evidence of these “written exclusive dealing contracts,” the Court rejected this argument “Because the complaint does not allege the Distributors signed any agreement consenting to the letter’s terms or otherwise expressly agreed to its terms, there was no “ ‘meeting of the minds.’ Accordingly, the Court held that “the letter alone cannot constitute a written exclusive-dealing contract.”
Insulate additionally argued that Graco and the Distributors’ preexisting distributorship contracts were express contracts not to compete because, in its 2007 letter, Graco referenced the contracts’ “best efforts clause.” However, the Court rejected the contention concluding that “Graco’s unilateral announcement of its decision not to supply distributors who also sell competing products did not transform a prior innocuous distributor agreement into a contract for exclusive dealing.” In so concluding, the Court referred to precedent holding that a manufacturer’s later request that its products not be sold below certain prices did not transform preexisting sales agreements between the manufacturer and its distributors into agreements not to compete. Similarly, the Court also pointed to an earlier Eighth Circuit case explaining that, although the defendant’s discount program may have created “de facto exclusive dealing arrangements,” the discount agreements themselves “were not exclusive contracts”.
Next, the Appeals Court turned to the issue of whether the plaintiff had sufficiently alleged an implicit antitrust conspiracy by simply pointing to Graco’s 2007 and 2012 letters, along with some distributors’ resulting compliance, as “circumstantial evidence of anticompetitive agreements.” Again rejecting the plaintiff’s argument, the Court concluded that “in both the 2007 and 2012 letters, Graco simply stated its policy of not selling to distributors who also sold competitors’ products.” Reaffirming one of the most sacrosanct concepts in antitrust law, the Court stated: “The federal antitrust laws “do[ ] not restrict the long recognized right of [a] manufacturer engaged in an entirely private business, freely to exercise his own independent discretion as to parties with whom he will deal; and, of course, he may announce in advance the circumstances under which he will refuse to sell. Under the “Colgate doctrine,” “[a] manufacturer … generally has a right to deal, or refuse to deal, with whomever it likes, as long as it does so independently .” Summarizing a similar concept from a post-Colgate Supreme Court case, Monsanto, the Eighth Circuit stated: “Indeed, a “manufacturer can announce its [policy] in advance and refuse to deal with those who fail to comply. And a distributor is free to acquiesce in the manufacturer’s demand in order to avoid termination.”
The Appeals Court then announced what it would have accepted as sufficient for the plaintiff’s complaint to make it beyond a motion to dismiss:
To allege the existence of a conspiracy adequately, Insulate must present something beyond the mere fact that Graco stated its policy and the Distributors complied. In United States v. Parke, Davis & Co., 362 U.S. 29, 80 S.Ct. 503, 4 L.Ed.2d 505 (1960), the Supreme Court explained that plaintiffs can prove concerted action by showing a manufacturer took some action “beyond mere announcement of his policy and the simple refusal to deal[ and] employ[ed] other means which effect adherence to his” policies. Id. at 44; see, e.g., Monsanto, 465 U.S. at 765 (holding defendant’s attempts to force its distributors to comply with its resale price policy went beyond the Colgate doctrine’s limits); Parke, Davis, 362 U.S. at 33–36, 45 (deciding a company that policed the implementation of its resale price policy and individually met with each of its wholesalers and retailers to ensure compliance exceeded Colgate ).
In finding that an ‘announcement followed by adherence’ is not an unlawful antitrust conspiracy, the Court explained that the Colgate case and its progeny “protects a manufacturer who communicates a policy and then terminates distribution agreements with those who violate that policy. “The mere announcement of [an exclusive-dealing] policy, and the carrying out of it by canceling [a] noncomplying dealer, would not establish an agreement.” The Court also quoted from one of its antitrust decisions in 1993, which explained that the plaintiff’s evidence that a manufacturer decreased its supply to a noncompliant distributor and told the distributor to “reconsider” its noncompliant activities was not sufficient to support the jury’s finding of a conspiracy and reversing the district court’s denial of judgment as a matter of law to the manufacturer.
Recognizing the death-knell associated with application of Colgate, Insulate affirmatively attempted to distinguish Colgate, by maintaining that the appellees took actions to enforce their agreements that went “ ‘beyond [the] mere announcement of [a] policy and the simple refusal to deal.’ However, the Court responded “But the complaint does not describe any conduct suggesting an agreement between Graco and the Distributors. While the complaint makes some vague references to concerted action among “key Distributors,” Insulate does not provide any factual allegations beyond the bare conclusion that there was a conspiracy.” Similarly, according to the Court, “The complaint does not allege when the agreements occurred or even identify which of the distributors named as defendants—if any—are among the “key Distributors” who were party to the agreements. Without some supporting factual allegations, these conclusions are insufficient.”
With regard to the Insulate’s particular allegations, the Court observed that “The only allegations in the complaint that come close to suggesting a conspiracy are those concerning Foampak. The complaint avers Graco, after learning Foampak was considering taking on a competitive product line, flew two “top executives” to Foampak’s headquarters to meet with Foampak executives. At this meeting, Graco threatened to end Foampak’s distributorship, so Foampak chose not to carry a competitive product. Insulate compares Graco’s actions here to similar behavior in Monsanto, which the Supreme Court found exceeded the Colgate doctrine’s limits.” The Court’s discussion here was based, in part, on the prior finding that Monsanto’s multiple attempts to force distributor compliance with its resale price policy by threatening termination and “complain[ing] to [a] distributor’s parent company” were sufficient to support the jury’s finding of an anticompetitive conspiracy.
In turn, the Court created another analytical gauntlet for the plaintiff, asserting that “Assuming Insulate’s complaint sufficiently alleges an agreement between Foampak and Graco, Insulate cannot challenge this conspiracy because it has not named Foampak as a defendant.” The failure to name Foampak was fatal, even though the complaint does allege Foampak had “communications with fellow Distributors.” According to the Court, even this broad implication that these other distributors may have been part of the alleged Graco–Foampak conspiracy was insufficient to pass muster as “Insulate does not identify any other distributor by name, suggest when these communications occurred, or provide any other specific factual allegation that would create an inference that an agreement was made.”
In sum, the Court granted the franchisor and distributors’ motions to dismiss as “The complaint repeatedly asserts Graco and an unnamed set of distributors generally conspired to restrain trade, but these assertions are not enough, since“[A] naked assertion of conspiracy … gets the complaint close to stating a claim, but without some further factual enhancement it stops short of the line between possibility and plausibility of entitlement to relief.” Without the necessary “factual enhancement” the Court could not allow Insulate’s federal antitrust claims to proceed.
The Court then turned to the Minnesota state antitrust claim, which the district court had dismissed. Here, Insulate claimed that the district court erroneously concluded Insulate, as a non-citizen of Minnesota, could not bring this claim. Assuming without deciding Insulate can bring a claim under Minnesota antitrust law, the Court affirmed the dismissal “because Insulate failed to state its claim adequately.” In essence, the Court relied upon the similarity of the state and federal antitrust laws to support its ruling: “Because “Minnesota antitrust law is generally interpreted consistently with federal antitrust law … and Insulate agrees our analysis of its federal claims also applies to its Minnesota claim, Insulate’s Minnesota antitrust claim also must be dismissed for failure to state a claim.”
With respect to the California claims, the Court followed its reasoning used to evaluate the Minnesota statute in dismissing the California antitrust claim. First, the Court equated substantively the Sherman Antitrust Act and the Cartwright Act: “A long line of California cases has concluded that the Cartwright Act is patterned after the Sherman Act and both statutes have their roots in the common law. Consequently, federal cases interpreting the Sherman Act are applicable to problems arising under the Cartwright Act.” Second, the Court latched onto the defective pleading process of Insulate: “Because Insulate has not sufficiently pled a claim under federal antitrust law, Insulate also has not stated a claim under the Cartwright Act.”
Last, Insulate attacked on appeal the dismissal of its claim under California’s Unfair Competition Law (UCL). The UCL in “prohibits unfair competition, including unlawful, unfair, and fraudulent business acts.” There are two general analytical prongs of unfairness established in the UCL, including unlawfulness and unfairness. The district court found Insulate failed to state a claim under the UCL’s unlawful prong because Insulate did not allege a violation of the antitrust laws. Insulate on appeal claimed that the appellees engaged in both unlawful and unfair business practices.
Addressing the unlawful component first, the Court stated “As discussed above, Insulate has not sufficiently pled the appellees violated any antitrust law and thus has no claim under the UCL’s unlawful prong.” In this regard, the Court relied on precedent that taught that “[t]o be ‘unlawful’ under the UCL, the [defendant’s] advertisements must violate another ‘borrowed’ law” and affirming the dismissal of the plaintiff’s UCL claim because he failed to plead adequately a violation of California’s False Advertising Law.”
With regard to the unfairness prong of the UCL, the Court held that Insulate also failed to plead a violation of the UCL. The Court’s basis for this ruling was found in the contextual definition of ‘unfair’: “In the antitrust context, “the word ‘unfair’ … means conduct that threatens an incipient violation of an antitrust law, or violates the policy or spirit of one of those laws because its effects are comparable to or the same as a violation of the law, or otherwise significantly threatens or harms competition.” After setting out this standard, the Court ruled that Insulate’s allegations were insufficient to meet it: “Here, Insulate has only pled actions consistent with Graco’s “right to deal, or refuse to deal, with whomever it likes,” which is not unfair conduct.” In this regard, the Court was adamant that “[A]cts permissible under antitrust laws ‘cannot be deemed unfair under the unfair competition law,’ at least not where a plaintiff alleges that the acts are unfair for the same reason it argues that they violate antitrust law.”
In affirming the district court’s broad sweeping dismissal all of the plaintiff’s antitrust claims, the Court emphasized again that: “While “it is one thing to be cautious before dismissing an antitrust complaint in advance of discovery, [it is] quite another to forget that proceeding to antitrust discovery can be expensive.”
By: Jeffrey M. Goldstein
Goldstein Law Firm, PLLC
(202) 293 3047