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From Antitrust Law Daily, February 12, 2018

Challenge to exclusivity agreements between tile maker, distributors proceeds

By Glenn Sulzer, J.D.

Exclusivity agreements between the dominant manufacturer in the ceiling tile market and specialized distributors gave rise to plausible claims of anticompetitive conduct in the United States under the Sherman Act and the Clayton Act, according to the federal district court Wilmington, Delaware. The court deferred disposition of factual defenses raised by the manufacturer for trial, but the ruling will allow the plaintiff access to discovery in support of its claims (Roxul USA, Inc. v. Armstrong World Industries, Inc., February 9, 2018, Kearney, M.).

Ceiling tile manufacturers sell approximately 85 percent of their ceiling tile offerings through distributors specializing in building product materials. However, due to market forces, regional and national distributors have consolidated, resulting in a limited number of distributors capable of servicing the manufacturers.

Armstrong World Industries manufactures and sells ceiling tiles and related products, controlling at least 55 percent of the market in the United States and Canada. Three firms, including plaintiff Roxul USA, compete against Armstrong in the ceiling tile market in the U.S. and Canada. In order to protect its market share in the consolidating distributor market, Armstrong negotiated exclusivity agreements with distributors in the U.S. and Canada. Pursuant to the agreements, Armstrong’s exclusive distributors were not permitted to carry the ceiling tiles of competing manufacturers, such as Roxul. Armstrong policed the exclusivity agreements by raising prices of noncompliant distributors, enforcing contract provisions allowing for liquidated damages, and refusing to supply its products to distributors after a breach. Armstrong further threatened retaliatory actions against distributors who sell or attempt to sell the products of competitors in non-exclusive territories. The exclusivity arrangements, it was alleged, effectively allowed Armstrong to raise its prices and charge more than five percent over competitive prices, despite an overall decline in sales volume in the ceiling tile market.

Roxul, citing the anticompetitive effects of the exclusivity agreements in the United States and Canada, brought suit under the Sherman Act and the Clayton Act. Armstrong moved to dismiss the complaint, maintaining primarily that the exclusivity agreements were not anticompetitive and did not foreclose Roxul from a substantial portion of the ceiling tile market.

Anticompetitive conduct in Canada. Initially, the court narrowed Roxul’s complaint, ruling that the company failed to state a claim for antitrust violations based on the exclusivity agreements in Canada. The Sherman Act does not generally apply to conduct involving trade or commerce with foreign nations. However, an exception is authorized for conduct that creates a "direct, substantial, and reasonably foreseeable effect" on domestic trade or commerce. The exception, the court noted, requires a plaintiff to allege that its claims were directly caused by the domestic (and not the foreign) effects of the conduct.

The court acknowledged that the exclusivity agreements reduced competition in Canada. However, the court concluded that Roxul failed to allege how foreclosures from the Canadian market directly, substantially, and foreseeably affected U.S. commerce. The effect on the U.S. market of the reduced competition in Canada, the court reasoned, was too speculative to state a claim under the domestic commerce exception.

Exclusivity agreements. In next addressing Roxul’s claim that the exclusivity agreements allowed Armstrong to obtain and maintain monopoly power over the ceiling tile market in the United States, the court looked to whether the complaint alleged that Armstrong had a dominant share in the market that was protected by significant entry barriers. Roxul stressed Armstrong’s dominant market share. However, a market share of 55 percent, the court advised, is typically not sufficient, by itself, to demonstrate prima facie monopoly power. In addition, in order for an exclusive dealing arrangement to be viewed as anticompetitive (under the "rule of reason") the probable effect of the arrangement must be to substantially lessen competition, rather than to merely disadvantage rivals. Thus, Roxul would need to allege that the exclusivity arrangements resulted in a substantial foreclosure of the market.

The court concluded that Roxul plausibly pleaded monopoly power on the part of Armstrong. In addition to Armstrong’s 55 percent share of the market, the complaint alleged a high barrier of entry to the market and highlighted Armstrong’s history of controlling prices despite an overall decrease in sales volume in the market. Specifically, the complaint noted that Armstrong’s prices were five percent over market and plausibly charged that the exclusivity arrangements effectively prevented new competitors from entering the market.

Similarly, the court found that the complaint sufficiently pleaded the willful acquisition of monopoly power by Armstrong through the exclusivity agreements. Roxul was not required to state a specified percentage of the market being foreclosed and its complaint adequately alleged that the exclusivity agreements and Armstrong’s retaliatory conduct against the noncompliant distributors foreclosed competition in the ceiling tile market.

Armstrong argued that the U.S. market was not substantially foreclosed by the exclusivity contracts because Roxul had alternate distribution channels to reach customers, including direct-buy contractors and "big-box" home improvement retailers. The court, however, found Armstrong’s factual defenses regarding the availability and viability of the alternative distribution channels to be best reserved for summary judgment or trial.

Alternatively, Armstrong maintained that it had valid business justifications for entering into the exclusivity contracts. The exclusivity agreements promoted competition, Armstrong averred, because they encouraged distributors to more aggressively market its products. The court again, however, found that such defenses were best left to trial. Moreover, the defenses did not preclude Roxul from alleging facts sufficient to outline the anti-competitive effects of the exclusivity arrangements on the market.

Finally, the court ruled that Roxul did allege harm to competition in the market that was directly connected to Armstrong’s conduct. The facts alleged allowed for a reasonable inference that injury to competition was causally connected to Armstrong’s exclusivity arrangement.

Attempted monopolization. Continuing its line of reasoning, the court proceeded to find that that Roxul adequately stated a claim under the Sherman Act for attempted monopolization. Roxul adequately alleged anticompetitive conduct through the exclusivity agreements, which foreclosed competitors from accessing a significant portion of the ceiling tile market. In addition, the allegation allowed for a reasonable inference that Armstrong acted with the specific intent to monopolize the market. Finally, the complaint sufficiently alleged that the exclusivity agreements, by preventing the entry of new competition into the market, raised the probability of Armstrong achieving monopoly power.

Restraint of trade. As a final matter, the court held that Roxul adequately alleged that Armstrong engaged in concerted action in restraint of trade with building material distributors in violation of the Sherman Act and the Clayton Act. Roxul sufficiently alleged, the court explained, that the exclusivity contracts created an unreasonable restraint of trade by preventing competitors from entering the ceiling tile market and foreclosing competitors from a substantial share of the market.

The case is No. 17-1258.

Attorneys: Joseph J. Farnan, Jr. (Farnan LLP) for Roxul USA, Inc. Kevin J. Mangan (Womble Bond Dickinson [US] LLP) for Armstrong World Industries Inc.

Companies: Roxul USA, Inc.; Armstrong World Industries Inc.

MainStory: TopStory Antitrust DelawareNews

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