On March 13, 2007, United States District Court Chief Judge Vaughn Walker decided summary judgment motions in a complex group boycott case arising out of alleged efforts by Federated Department Stores (“Federated”), May Department Stores (“May”), Lenox Incorporated (“Lenox”) and Waterford Wedgwood (“Waterford”) to boycott Bed Bath & Beyond, a competitor of May and Federated. In Re: Tableware Antitrust Litigation (No. 04-3514 VRW, N.D. Cal.). Judge Walker’s typically painstaking opinion provides a textbook quality overview of an area of antitrust law not currently known for its clarity: the interplay between horizontal group boycott allegations, the per se rule and application of the Matsushita standard for analyzing summary judgment where no direct evidence of the horizontal group boycott exists.
The case arises out of efforts by Waterford and Lenox in early 2000 to expand the distribution channels for their high-end tableware lines to include Bed Bath & Beyond and other specialty retailers. In early 2001, Bed Bath & Beyond agreed with Waterford and Lenox to participate in a test roll-out of Waterford and Lenox high-end housewares at a limited number of Bed Bath & Beyond stores. Lenox and Waterford high-end tableware and other houseware items had traditionally been distributed only through better department stores, and not through specialty retailers and discounters. Allegedly, upon finding out that Lenox and Waterford intended to commence distribution through Bed Bath & Beyond, executives at both Federated and May actively attempted to persuade Waterford and Lenox not to distribute through Bed Bath & Beyond, and threatened retribution, including assertedly refusing to carry Lenox or Waterford products. The test was cancelled, with Lenox and Waterford then refusing to supply goods to Bed Bath & Beyond, even on a test basis. Approximately a year later, Waterford did begin to sell Wedgwood table products through Bed Bath & Beyond. Lenox followed suit, also in late 2002.
A putative class of retail consumers who shopped at Bed Bath & Beyond sued, alleging various violations of the antitrust laws, including three interrelated but distinct boycott cases:
1) A horizontal agreement between Federated and May,
2) A horizontal agreement between Waterford and Lenox, and
3) Vertical agreements among all defendants designed to achieve a boycott by Waterford and Lenox of Bed Bath & Beyond.
Defendants ultimately moved for summary judgment, asserting that (1) the plaintiffs, as indirect purchasers, lack standing to challenge certain of the alleged conspiracies, (2) the alleged boycotts were not per se illegal, which was plaintiffs’ only alleged theory of illegality, and (3) in any event, no direct evidence of conspiracy had been discovered and circumstantial evidence proffered by plaintiffs was insufficient to preclude summary judgment under the Supreme Court’s decision in Matsushita.
Before moving to the merits, Judge Walker had to decide the extent to which the plaintiff class of retail purchasers had standing to make the claims asserted. He used the five-factor test for determining whether plaintiffs have antitrust standing articulated by the Supreme Court in Associated Federal Contractors of California, Inc. v. California State Council of Carpenters, 459 U.S. 519, 530-35 (1983). He ultimately concluded that (1) the retail purchasers were consumers in the restrained market for high-end tableware, (2) their injuries were clearly a product of the allegedly illegal conduct if it occurred, (3) damages were ascertainable, though might be somewhat speculative, (4) recovery would not be duplicative, and (5) the apportionment of damages would not be exceedingly complicated.
However, the Court went on to caution that insofar as plaintiffs complained about a horizontal agreement between Waterford and Lenox, the upstream manufacturers of the goods in question, the retail purchasers were indirect purchasers of those goods since they dealt only with the department stores and Bed Bath & Beyond, not with the manufacturers. As a result, the class of retail purchasers were "indirect purchasers" and so were precluded from bringing that claim under the Supreme Court’s decision in Illinois Brick Co. v. Illinois, 431 US 720 (1977). Judge Walker went on to explicitly hold that Illinois Brick was equally applicable in the group boycott context as it was in the price fixing context.
Judge Walker then moved to the first substantive ground in defendants’ summary judgment motions – that plaintiffs exclusive reliance on a per se claim required dismissal of their case because the alleged group boycott conspiracies should be judged under the rule of reason, not per se illegality. Judge Walker then made a detailed historical survey of the Supreme Court and Ninth Circuit cases discussing the application of the per se rule in the group boycott context. He noted, citing a number of recent Supreme Court cases, that the tendency has increasingly been to restrict rather than expand the per se rule. This has prompted commentators and some lower courts to conclude that the per se analysis is inappropriate unless the boycotting party or parties possesses market power, or exclusive access to an element essential to effective competition. But after reviewing additional Supreme Court authority, in particular FTC v. Superior Court Trial Lawyers Association, 493 U.S. 411 (1990) and NYNEX Corp. v. Discon Inc., 525 U.S. 128 (1998), Judge Walker concluded that the current state of federal law does not require market power to condemn a horizontal agreement to injure another direct horizontal competitor.
He then moved on to determine whether the of alleged restraint at issue, assuming it occurred, was the sort of "naked restraint" on competition which merits per se condemnation. He focused on the three-factor test created by the Ninth Circuit in Adaptive Power Solutions, LLC v .Hughes Missile Systems Co, 141 F. 3d 947, 950 (9th Cir. 1998). The three Adaptive Power per se criteria are whether the restraint:
1) cuts off access to a supply, facility, or market necessary to enable the victim firm to compete,
2) is engaged in by firms possessing a dominant market position, and
3) is not justified by plausible arguments that the agreement enhanced overalll efficiency or competition.
Ultimately, Judge Walker concluded that group boycott alleged here is a classic commercial agreement between horizontal competitors to injure another direct trade competitor. In this regard, he distilled current existing boycott law to conclude that plausible arguments about enhanced overall efficiency or competition have been confined to circumstances where the alleged boycott activity occurred in the context of "industry self regulation, sports leagues, health care, non-economic boycotts and access to joint venture facilities."
Accordingly, he rejected Defendants’ summary judgment motion to the extent that it relieed upon claiming that the conduct at issue should be judged by the rule of reason rather than the per se rule. However, Judge Walker noted that to the extent plaintiffs complain about a vertical boycott agreement, such vertical agreements are entitled to rule of reason treatment under settled Supreme Court law. Since plaintiffs rely exclusively on the per se rule, their claims alleging illegal vertical arrangements must be dismissed.
Judge Walker then dealt with defendants’ central ground for summary judgment – that there is insufficient evidence of concerted action for plaintiffs’ claim to survive summary judgment. He begins by noting the now accepted Monsanto standard for determining the existence of concerted action as requiring "evidence that tends to exclude the possibility of independent action" in the form of "direct or circumstantial evidence that reasonably tends to prove that [defendants] had a conscious commitment to a common scheme designed to achieve an unlawful objective."
Judge Walker then concluded that the plaintiffs have presented no direct evidence of such a horizontal agreement, and so the Court was required to analyze plaintiffs’ circumstantial evidence to determine whether reasonable inferences from that circumstantial evidence could defeat summary judgment under the Supreme Court’s decision in Matsushita Electric Industrial Co. v Zenith Radio Corp, 475 U.S. 574 (1986). The balance of the decision constitutes a textbook example of how to apply the Matsushita analysis for evaluating circumstantial evidence in the context of a horizontal group boycott case. Most importantly, it dramatically illustrates the critical importance of certain nuances in the Matsushita analysis, especially the importance of determining whether particular defendants have any objectively rational economic motive to join the alleged conspiracy. Judge Walker proceeded to analyze the same evidence in the context of the two distinct alleged horizontal conspiracies between Federated and May, and Waterford and Lenox, and reached completely different conclusions.
Judge Walker began by observing that the Supreme Court in Matsushita required a particular view of potentially ambiguous circumstantial evidence in a Sherman Acts Section 1 horizontal conspiracy case because “conduct that is as consistent with permissible competition as an illegal conspiracy does not, standing alone, support an inference of any antitrust conspiracy.” 475 U.S. F. at 588. As a result, plaintiffs had to show that the inference of conspiracy was reasonable in light of (1) competing inferences of independent action which in turn required determining “whether the Defendant had any rational motive” to join the alleged conspiracy and (2) whether the defendant’s conduct “was consistent with the defendant’s independent interest.” Matsushita, 475 US at 596-97. In turn, Judge Walker went on to note that the Ninth Circuit has crafted its own complementary analysis permitting defendants to “rebut an allegation of conspiracy by showing a plausible and justifiable reason for its conduct that is consistent with proper business practice.” In Re: Citric Acid Litigation, 191 F. 3d, 1090, 1094 (9th Cir. 1999) If the defendant does so, then the burden shifts back to plaintiffs to provide specific evidence tending to show the defendants were not engaging in permissible competitive behavior.
With these basic principles in mind, Judge Walker reviewed circumstantial evidence proffered by plaintiffs in the case. It is unnecessary to discuss that review in detail here, except to observe that the type of circumstantial evidence adduced by the plaintiffs reflects communications between the department stores on the one hand, and the suppliers of high-end tableware on the other, discussing in general terms the advisability of the proposed Bed Bath and Beyond test. While there were general expressions of disagreement with the test by the department stores, there was no direct evidence of threats or promises to cease doing business.
A noteworthy aspect of evidentiary analysis is the way the Court used the test of economic rationality to evaluate the same body of evidence but reach different conclusions about the two alleged conspiracies. On the one hand, the Court found the circumstantial evidence to be sufficient to defeat a summary judgment motion by the department stores, Federated and May. In so doing, Judge Walker focused on what he characterized as the heart of Matsushita, which was the insight that as a conspiracy allegation seemed to be more economically implausible, more persuasive evidence of conspiracy would be necessary to defeat summary judgment on a sliding scale. Here, the Court viewed the alleged conspiracy between the department stores to injure their specialty retailer direct competitor, Bed Bath and Beyond, as completely economically plausible. In fact, it mirrored the classic group boycott fact pattern in which direct competitors ban together and seek to deny critical competitive inputs (the high-end tableware produced by Lenox and Waterford) to another direct horizontal competitor.
In sharp contrast, Judge Walker stated that the “same economic intuition fails to account for the alleged conspiracy between Lenox and Waterford.” Nothing in the record established an economic motive for a conspiracy between Waterford and Lenox to back out of the Bed Bath and Beyond rollout. There was no articulated reason why the two high-end tableware suppliers harbored particular animosity towards Bed Bath and Beyond. The alleged conspiracy thus did not appear to be economically rational. Such manufacturers would have every reason to establish ties with newcomer competitors who offered additional mechanisms for distribution. As a consequence, plaintiffs’ evidence, would not be sufficient to meet their burden of presenting circumstantial evidence which tended to “exclude the possibility that the alleged conspirators acted independently” for Lenox and Waterford. Monsanto, 465 U.S. 768.
In summary, Chief Judge Walker’s decision serves as a useful primer for analyzing the interplay between alleged horizontal group boycotts, the per se rule, and the Matsushita structure for analyzing summary judgment in horizontal conspiracy cases dependent upon circumstantial evidence, especially in the Ninth Circuit.