It appears that the 3M Company has another exclusive dealing problem based on allegedly anti-competitive unilateral conduct, which in the current antitrust environment is significant news. The appropriate boundaries of unilateral anticompetitive activity have been a subject of intense interest in the antitrust bar since the Supreme Court’s decision in Verizon Communs., Inc. v. Law Offices of Curtis V. Trinko, 40 U.S. 398 (2004). Trinko is typically characterized as reflecting increasing judicial skepticism with most antitrust theories attacking unilateral actions by an alleged monopolist. This skepticism has arguably complicated Section 2 monopolization and attempted monopolization cases, and resulted in such cases increasingly being resolved against plaintiffs at the early stages of litigation, particularly when brought by other competitors. However, and seen as bucking the overall trend, in 2003 the Third Circuit upheld a monopolization verdict against 3M arising in large part out of exclusive dealing arrangements which 3M had made with major sellers of clear tape in a case brought by a competitor. See LePage’s Inc. v. 3M, 324 F.3d 141 (3rd Cir. 2003). It now appears that 3M, at least at the pleading stage, has been unsuccessful in another Section 2 monopolization claim brought by a competitor because of exclusive distribution arrangements with distributors, this time for retail automotive coated abrasives like sandpaper and polishing and grinding disks. NicSand Inc. v. 3M Company, 05-3431 (6th Cir. 2006) (filed August 8, 2006) ("NicSand").
The Sixth Circuit’s decision in NicSand reviving a complaint dismissed in the trial court is therefore interesting in a number of ways. First, it arguably marks a departure from the recent perceived constriction of Section 2 monopolization claims by competitors, and coincidentally also involves 3M and exclusive dealing arrangements. Second, it is an example of a situation where exclusive dealing contracts are attacked not under Section 1 of the Sherman Act as anticompetitive agreements in restraint of trade (the traditional claim), but instead as impermissible unilateral action that allegedly constitutes monopolization and attempted monopolization. Three, the case presents an interesting fact pattern in which an existing market niche was dominated by a small company, which was then displaced in a very short time by a much larger company that then proceeded to dominate the space in turn, provoking interesting questions about antitrust injury and standing as discussed below.
NicSand arose when 3M took steps to increase its presence in the market for DIY (do-it-yourself) retail automotive coated abrasives. According to the facts as alleged, more than 80% of such products sold nationally are distributed through six "big box retailers" – Advanced Auto Parts, Auto Zone, CSK Auto Corporation, K-Mart, Pep Boys and Wal-Mart. In 1996, NicSand had a 67% share of the wholesale market. In 1997 3M initiated a series of transactions that resulted in exclusive contracts with four of the six major big box retailers at very substantial discounts to the prices previously offered by NicSand. One of the remaining two distributors, Wal-Mart, also had a so-called "wrap around program" in which 3M provided discounts conditioned upon Wal-Mart purchasing a complete line of coated abrasives which included abrasives for wood and other surfaces as well as automobiles. The practical impact of 3M’s exclusive arrangements, entered into between 1997 and 2000, was to leave NicSand with only significant business at Pep Boys and a small amount of business at Wal-Mart. NicSand entered bankruptcy in 2001. NicSand filed a Section Two case claiming that the exclusive contracting program constituted monopolization and attempted monopolization, although it did not allege that the prices offered by 3M to the big box retailers were predatory or improperly below any legally applicable measure of cost.
The fact pattern just described confronted the Court with a number of complex standing and injury questions. Initially, the Sixth Circuit had to confront whether Section 2 was even an appropriate vehicle for challenging such exclusive dealing arrangements. Analyzing a number of cases and treatises, and relying heavily on its own prior decision in Cottonwood Co. v. US Tobacco Co., 290 F.3d 768 (6th Cir. 2002), the Sixth Circuit concluded that exclusive dealing contracts could at least theoretically form the basis for a unilateral monopolization claim. The Court noted that in the typical exclusive dealing situation, the downstream distributor has the incentive to achieve the lowest possible price from the upstream supplier. This incentive, unless the seller has market power, should result in a negotiated discount that includes some discount to reflect the increased possibility that the upstream supplier could gain market power through the exclusive dealing arrangement. However, the Sixth Circuit noted that any one of the four retailers who did an exclusive deal with 3M might not necessarily seek low enough prices to defray the potential anticompetitive impact of the increased market power which resulted from multiple exclusive arrangements being created by 3M.
The Sixth Circuit was unequivocal that 3M’s conduct could constitute an antitrust violation under Section 2 for pleading purposes. The District Court had found that the exclusive dealing contracts at issue were no more than 3M’s appropriate response to a concentrated market with significant entry barriers given the way large retailers renegotiated contracts on only an intermittent basis, and so constituted appropriate pro-competitor behavior. The Sixth Circuit felt that on the facts as alleged, it was required to accept as true that the multiple exclusive agreements created by 3M over a two-and-a-half-year period resulted in the creation of market power through means other than a superior product or business acumen. The Sixth Circuit rejected the notion that an antitrust claim could not be stated in this fact situation without also alleging that the discounted prices offered by 3M to the big box retailers were predatory.
The Sixth Circuit then turned to the issue of competitor standing. In particular, the Sixth Circuit credited the notion that the obvious private plaintiffs to enforce Section 2 of the Sherman Act in this circumstance were the big box retailer purchasers. However, the Sixth Circuit also observed that there could be powerful real world incentives restraining the large retailers from taking legal action. Under those circumstances, it was appropriate in the Court’s view to permit NicSand to serve as an advocate for the downstream distributors economic interests even though it was 3M’s direct competitor.
Finally, the Sixth Circuit struggled at length with the concept of "antitrust injury." In a detailed review of Sixth Circuit case law following the Supreme Court’s seminal announcement of the antitrust injury requirement in Brunswick Corp. v. Pueblo Bowl-O-Mat, 429 US 477 (1977), the Sixth Circuit stated that it was absolutely required for NicSand to plead cognizable impact on the competitive process apart from any negative economic impact on NicSand itself. Ultimately, the Sixth Circuit focused on the fact that the complaint alleged that 3M’s exclusive dealing agreements brought about the elimination of a superior product purely through improperly acquired market power. Moreover, and somewhat perversely, the Sixth Circuit also focused on the fact that prior to 3M’s entry, NicSand was essentially the only substantial participant in the market. In other words, market injury would have to have overlapped to a degree with NicSand’s injury because NicSand played such a substantial role in the market before 3M entered.
Perhaps not a surprise, the majority decision provoked a scathing dissent. The dissenting judge made the expected observation that 3M’s conduct was manifestly pro-competitive since it displaced an entrenched monopolist by offering lower prices. Moreover, it was perfectly obvious from a description of the market, even as alleged by the plaintiff, that the market was dominated by a discrete group of powerful and sophisticated purchasers with plenty of market power of their own who were more than capable of looking after their own interests. Finally, the dissenting judge was wholly unpersuaded that the products at issue were sufficiently sophisticated or unique so that barriers to entry existed which could not be surmounted in the future by another entrant in the same way 3M had displaced NicSand. Petitions for rehearing en banc and ultimately a petition for certiovari would seem to be a distinct possibility.