In a reversal of the dismissal of the Department of Justice Antitrust Division (DOJ) complaint, alleging violations of Section 1 and 2 of the Sherman Act and Section 3 of the Clayton Act, the Court of Appeals for the Third Circuit found Dentsply International Inc. (“Dentsply”) guilty of illegal monopoly power maintenance. DOJ opted not to appeal adverse district court rulings on the Sherman Act Section 1 and the Clayton Act Section 3 claims. The court remanded for the entry of the injunctive relief prayed for.
In United States v. Dentsply International Inc., No. 03-4097 (3d Cir.), decided February 24, 2005, the court held that Dentsply was unlawfully maintaining its monopoly position in a market described as “prefabricated artificial teeth in the United States.” The district court had held that while Dentsply held a market share position of 75% – 80% for over ten years, and was 15 times larger than its next closest competitor, it had nevertheless not exercised market power in the relevant market. The district court found that while Dentsply had imposed exclusive dealing arrangements, referred to as “Dealer Criterion 6”, which required dealers to agree not to handle competing lines of artificial teeth, competing manufacturers had ample opportunities to sell directly to the dental labs, with whom the dealers also dealt1. Because of the ability of competing manufacturers to substitute into direct selling channels of distribution, Dentsply would be unable to exercise market power.
The Third Circuit, however, ruled that Dentsply indeed had monopoly power in a relevant market consisting of the total sales of artificial teeth to dental laboratories and dental dealers combined. It had clearly expressed plans to maintain this power, and had been able to do so by preventing entry into “gateway” dealers by precluding Dentsply dealers from adding new competitive tooth lines that could constrain Dentsply’s pricing abilities. The court did agree with the district court, however that the use of “Dealer Criterion 6” was pretextual, exclusionary, and not business justified. The court found many similarities between the case and Le Page’s, Inc. v. 3-M, 324 F.3d 141 (3dCir. 2003).
By prohibiting its dealers from adding competitive lines of artificial teeth, Dentsply was able to deny transaction cost efficiencies to its substantially smaller rivals that could be derived from dealing through dental dealers. The impermeability of Dentsply’s 75% – 80% market share, from 1993 to the present, was evidence of monopoly power maintenance, and the creation of artificially imposed barriers to efficient scale entry by its smaller competitors.
The court also noted that Dentsply was able to successfully impose a series of price increases within the market without fear of not being followed by its smaller competitors. Thus, it had effectively imposed a price umbrella on the market. As the Third Circuit noted, Dentsply has “effectively choked off the market for artificial teeth, leaving only a small sliver for competitors”2. The district court “erred when it minimized that situation and focused on a theoretical feasibility of success through direct access to the dental labs.”3 It also noted that because of advances in dental medicine, the prefabricated artificial tooth market had little or no growth potential. Thus, the static nature of market share maintenance was an imposing element of Dentsply’s ability to shape the market to its liking.4
The decision suggests that it is a workable strategy for a monopolist to maintain the status quo, without eliminating all competition from rivals, and that it may engage in supra-competitive, although not profit maximizing pricing, by keeping its smaller competitors in their place through market discipline exercised through exclusive dealing contracts.5 Finally, the Third Circuit dismisses the district court’s reliance on dicta in Tampa Electric Co. v. Nashville Coal Co.,6 that DOJ must fail in its Sherman Act Section 2 case, where there was no liability under the stricter standard of Sherman Act Section 1 and Clayton Act Section 3. The court rejected this proposition, as a matter of law. The court stated that different theories may be presented to establish a cause of action. A refusal to accept one theory does not rule out others. The court stated: “Here, DOJ can obtain all the relief to which it is entitled under [Section 2]”7 and has opted not to appeal the adverse rulings as to DOJ’s Sherman Act Section 1 and Clayton Act Section 2 claim.
A good argument can be made that the market dynamics discussed by the court in finding monopoly power maintenance, under Section 2, would also support a finding of violations of the Sherman l and Clayton 3 claims. These factors would seemingly support a finding that Dentsply’s course of conduct would “flunk” the rule of reason. These factors include the relative disparity of the historic shares of the competing manufacturers of artificial teeth, the impermeability of the defendant’s share over an extended period, the effects of exclusivity clauses in denying access to “gateway” dealers, necessary to develop minimum sufficient scale for expansion. This should be so, notwithstanding the “at will” nature of the exclusive dealing clauses.8 They were as impermeable as the incumbent market share. This is also consistent with the district court finding that “Dealer Criterion 6” was pretextual, exclusionary, and not business justified. The Third Circuit remanded the case to the District Court for the District of Delaware with directions to grant the injunctive relief requested by the DOJ.
- Dentsply did business under “at-will arrangements with 23 dealers. While there were 16,000 dental labs, sales through the Dentsply dealer network accounted for 75%-80% on a revenue basis, and 67% on a unit basis. Slip Opinion at 4-6.
- Slip Opinion at 32.
- “This case does not involve a dynamic, volatile market like that in Microsoft, 253 F.3d at 70 . . . ” Id.
- Slip Opinion, at 8, 15, 17, 19, 20.
- 365 U.S. 320 (1961).
- Slip Opinion at 34.
- Again, the district court itself found that “Dealer Criterion 6” was pretextual, and without justification. Slip Opinion at 25.