Since the venerable case of Ace Beer Distributors v. Kohn, Inc.,[1] numerous courts have held that the substitution of one distributor for another is competitively neutral.  The courts have generally upheld refusals to deal and distributorship substitutions, even where a manufacturer decides to abandon a geographic area for product distribution, a line of business, or makes significant changes in the means by which it offers its product for distribution.[2]

[1] 318 F.2d 283 (6th Cir. 1963)

[2] See, generally, Antitrust Law Developments p. 170 et seq. (6th Ed. 2007).

In Norris v. Hearst Trust, No. 05-20710, (5th Cir. September 18, 2007), the Court of Appeals for the Fifth Circuit reaffirmed this trend by holding that forward vertical integration resulting in the termination of six former distributors of the Houston Chronicle newspaper, failed to state a claim upon which relief can be granted. The court so held despite allegations that the defendant was an alleged monopolist, and the terminations resulted from a refusal by the distributor plaintiffs to agree to inflate circulation figures, which would allow the defendant to artificially inflate its advertising rates.  The Fifth Circuit held that the distributors were "neither consumers nor competitors in the market" in which trade was allegedly restrained.  As such, the complaint failed to adequately allege "antitrust injury", and thus, plaintiffs lacked antitrust standing under Section 4 of the Clayton Act.

The complaint alleged violations of Section 1 and 2 of the Sherman Act and Section 2(a) of the Robinson Patman Act.  It alleged that the plaintiffs had for a number of years been contract distributors of the Houston Chronicle newspaper.[1]  Plaintiffs alleged that they were terminated by Hearst as distributors because they refused, or complained of, Hearst’s requests that they certify to the Audit Bureau of Circulations, falsely inflated numbers of "Home Delivery Subscribers".  The complaint alleged that the request was made because Hearst wished to increase the Chronicle’s advertising sales and revenues, where advertising rates were a function of home delivery subscriptions.

In granting defendant’s motion for summary judgment, on the ground that the complaint could not state a claim under Federal Rule of Civil Procedure 12(b)(6), the Court noted that there was no allegation that prices had been increased to subscribers, or to advertisers.  Thus, the Court held that because the plaintiffs were neither consumers nor competitors in the relevant market for the distribution of daily newspapers of general circulation in the greater Houston metropolitan area, the plaintiffs had failed to establish the required element of "antitrust injury".  The Court rejected the plaintiff’s argument that they had sustained "antitrust injury" because they were terminated due to their refusal to participate in alleged antitrust violations.

Citing the United States Supreme Court’s recent decision in Twombly[2] the Court noted that "a naked allegation of conspiracy or agreement without more specific factual allegations is not to be accepted as sufficient to state a claim under Section 1 of the Sherman Act."[3]  Citing Brunswick[4] the Court noted that "the antitrust laws were enacted for the protection of competition not competitors."  As the distributor plaintiffs were neither consumers nor competitors in the relevant market, they could not allege antitrust injury.[5]  Thus, even with allegations that the motive for the termination of the distributors was their refusal to participate in a scheme to artificially inflate the newspaper’s general circulation figures, and even where the vertical integration forward was by an alleged monopolist in the relevant market, plaintiffs flunked the Associated Gen. Contractor’s test relative to adequacy and remoteness.  The Court distinguished McCready[6] on the ground that Mrs. McCready, a subscriber to her employer’s Blue Shield of Virginia pre-paid group health plan, was injured in her "business or property", in that the charges assessed against her for psychologist services had not been reimbursed.  The Court noted that Mrs. McCready was an appropriate plaintiff because:

"McCready has paid her psychologist bills; her injury consists of Blue Shield’s failure to pay her.  Her psychologist can link no claim to injury to himself arising from his treatment of McCready; he has been fully paid for his service and has not been injured by Blue Shield’s refusal to reimburse her for the cost of his services.  And whatever the adverse affect of Blue Shield’s action on McCready’s employer, who purchased the plan, it is not the employer as purchaser, but its employees as subscribers, who are out of pocket as a consequence of the plan’s failure to pay benefits."[7]

Thus, the case represents perhaps an expansive view of the proposition that the substitution of one dealer for another, even where a manufacturer vertically integrates forward, cannot affect competition, even though the net result is the termination of the plaintiffs as dealers, and even where the defendant is an alleged monopolist.

Authored by:

Don T. Hibner, Jr.


[1] Hearst acquired the only other competing daily newspaper of general circulation in the Houston area in 1995.  The Department of Justice approved the acquisition, and Hearst subsequently closed the competing newspaper, The Houston Post.  The Court’s opinion assumed that the Chronicle had a monopoly position in the relevant market.

[2] Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955, 1966 (2007).

[3] Id. at p. 10.

[4] Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, (1977). (italics original.)

[5] See also, discussion of Associated Gen. Contractors v. California State Council of Carpenters, 459 U.S. 519 (1983).

[6] Blue Shield v. McCready, 457 U.S. 465 (1982).

[7] Id. at 475.