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From Antitrust Law Daily, December 19, 2013

Direct purchasers of pool products state horizontal conspiracy claims against manufacturers and distributors

By Jody Coultas, J.D.

Direct purchasers of pool products stated per se illegal horizontal conspiracy claims against pool manufacturers and distributors, the federal district court in New Orleans has held (In re: Pool Products Distribution Market Antitrust Litigation, December 18, 2013, Vance, S.). However, the direct purchasers were unable to state fraudulent concealment claims against the defendants.

Pool Corporation, SCP Distributors LLC, and Superior Pool Products (collectively “Pool”) distribute products used for the construction and maintenance of swimming pools. Hayward Industries, Inc., Pentair Water Pool and Spa, Inc., and Zodiac Pool Systems, Inc. (collectively “manufacturers”) sell the products to Pool, and Pool sells them directly to direct purchasers. The direct purchasers include pool builders, pool retail stores, and pool service and repair companies.

The direct purchasers alleged that Pool and the manufacturers attempted to monopolize the pool market by acquiring rival distributors and by entering into agreements with manufacturers to exclude Pool’s rivals, engaging in an unlawful conspiracy to exclude Pool’s competitors, and that the defendants fraudulently concealed their illegal conduct. Specifically, the direct purchasers contended that manufacturers communicated with each other and Pool in order to facilitate an antitrust conspiracy to protect Pool’s market share.

When a business practice appears to be one that would always, or almost always, tend to restrict competition and decrease output, or is a naked restraint of trade, it is deemed a per se violation of Section 1 of the Sherman Act. In order for the per se rule to apply to such a claim, there must be a horizontal agreement among competitors. Evidence of the agreement must show a conscious commitment to a common scheme that excludes the possibility of independent action.

Horizontal conspiracy. The court held that the direct purchasers adequately pleaded a horizontal conspiracy to raise free freight limits, but they did not sufficiently allege a horizontal agreement to impose disadvantageous terms on buying groups. The manufacturers raised the required dollar purchase amount for an order to qualify for free freight by an identical amount within a three-month period. The purchasers also plausibly alleged that the manufacturers’ parallel conduct was contrary to their independent self-interest, and the increases were meant to price out Pool’s smaller rivals that could not afford to buy $20,000 worth of goods at a time. The manufacturers had no reason to raise their prices to Pool’s rivals unilaterally, and, absent parallel action by the other manufacturers, the manufacturer increasing prices would only be risking a loss of market share to the other manufacturers. It was plausible that each manufacturer individually agreed with Pool, in response to Pool’s complaints, to raise the free freight minimums, but the question at the pleading stage was not whether there was a plausible alternative to the purchasers’ theory. This factor weighed strongly in favor of the sufficiency of the purchasers’ allegation of a horizontal conspiracy to raise free freight minimums.

The direct purchasers also plausibly alleged that the defendants had an opportunity to form a horizontal conspiracy, according to the court. Allegations of an opportunity to conspire, standing alone, are insufficient to raise an inference of conspiracy. However, when added to the allegations that the parallel conduct was against the manufacturers’ individual self-interest, the existence of an opportunity to effectuate the alleged conspiracy takes on additional weight. Thus, the allegations that the manufacturers met was sufficient.

The court held that the direct purchasers plausibly alleged parallel conduct suggesting a preceding agreement and that the per se illegal conspiracy claims could continue. There were no specific allegations that conditions in the pool industry were ripe for collusion. However, indications that the market was weak at the time of the freight minimum changes strengthened the inference that those increases were the product of collusion. An e-mail from Pool’s CEO to Pool executives stating that the manufacturers “have all agreed to the $20,000 freight minimum with NO exceptions” was direct evidence that each manufacturer agreed with Pool to raise the freight minimums.

However, the direct purchasers did not adequately allege that the manufacturers conspired with each other to disadvantage buying groups. Buying groups are collectives that pool dealers formed to “try[] to leverage their collective volume of purchases to negotiate directly with manufacturers of Pool Products, thus bypassing PoolCorp” and “avoid[ing] PoolCorp’s monopoly pricing.” The direct purchasers’ claims did not plausibly allege that such conduct would be contrary to the manufacturers’ independent self-interest. The manufacturers required the buying groups to make substantial minimum purchases, which made good business sense for manufacturers of pools because the requirements minimized transaction costs associated with shipments. Also, the factual allegations purporting to show a conspiracy to impose onerous terms on buying groups were too vague and inconsistent with the proposition that the manufacturers colluded regarding the terms upon which they dealt with buying groups.

Fraudulent concealment. The doctrine of fraudulent concealment requires plaintiffs to prove that the defendants concealed the conduct alleged, and that the plaintiffs failed, despite the exercise of due diligence, to discover the facts that form the basis of the claims. Antitrust actions must be brought within four years from the date on which it accrues. The direct purchasers sought damages for injuries allegedly suffered before the four-year limitations period, contending that defendants fraudulently concealed their illegal conduct and that the direct purchasers did not discover the scheme until 2011 when a Federal Trade Commission investigation and consent decree were made public.

There was insufficient evidence that Pool fraudulently concealed vertical agreements with the manufacturers that violated Section 1 of the Sherman Act. Restrictive dealing agreements among manufacturers and Pool were not secret. It was well known in the industry that the manufacturers did not sell to Pool rivals and risked losing Pools business if they did sell to rival companies. There were also no specific allegations of who participated in the allegedly fraudulent communications, where and when the communications took place, or what was actually communicated. The blanket allegations that all of the manufacturers communicated with Pool in secret to cover up the alleged wrongdoing were insufficient.

Also, the direct purchasers failed to adequately allege that defendants fraudulently concealed the alleged horizontal conspiracy to increase the free freight minimums, according to the court. There were no allegations that the agreement was meant to be secret, much less that the defendants affirmatively concealed it.

The case is MDL No. 2328.

Attorneys: Camilo Kossy Salas, III (Salas LC) for Direct Purchaser Plaintiffs’ Liaison Counsel. Thomas J. H. Brill (Law Office of Thomas H. Brill) for Indirect Purchaser Plaintiffs’ Liaison Counsel. Arnold Levin (Levin, Fishbein, Sedran & Berman) for Plaintiffs’ Steering Committee. Wayne J. Lee (Stone, Pigman, Walther, Wittmann, LLC) for Manufacturer Defendants’ Liaison Counsel. William Bernard Gaudet (Adams & Reese, LLP) for Defendants’ Liaison Counsel. David H. Bamberger (DLA Piper, LLP) for Defendants’ Lead Counsel.

Companies: Pool Corporation; SCP Distributors LLC; Superior Pool Products; Hayward Industries, Inc.; Pentair Water Pool and Spa, Inc.; and Zodiac Pool Systems, Inc.

MainStory: TopStory Antitrust LouisianaNews

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