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From Antitrust Law Daily, April 12, 2013

Direct Purchasers State Attempted Monopolization, Restraint of Trade Claims Against Pool Products Distributor and Manufacturers

By Tobias J. Gillett, J.D., LL.M.

Direct purchasers of pool products have stated attempted monopolization and conspiracy in restraint of trade claims against the largest distributor and the three largest manufacturers of pool products in the United States over the distributor's alleged attempt to monopolize the market for pool products distribution in the United States and alleged distribution arrangements under which the manufacturers agreed not to sell to the competitor's rivals when the distributor directed them not to do so, the federal district court in New Orleans has ruled (In Re: Pool Products Distribution Market Antitrust Litigation, April 11, 2013, Vance, S.).

However, the court found that the purchasers did not state Section 2 monopolization claims or Section 1 per se illegal group boycott claims, and dismissed the plaintiffs' claim that the defendants fraudulently concealed their antitrust violations such that the plaintiffs could recover for violations beyond the four-year limitations period.

Pool Corporation, SCP Distributors LLC, and Superior Pool Products (collectively, "Pool") make up the country's largest distributor of pool products. After an investigation by the FTC into Pool's alleged unfair methods of competition resulted in a consent decree, direct and indirect purchaser plaintiffs filed suit against Pool and the manufacturers.

According to the plaintiffs, Pool is the only nationwide pool products distributor, operating 200 distribution centers with pricing controlled from its headquarters. Pool acquired all or some of the assets of 13 competing distributors between 1995 and 2009. It also allegedly had agreements with the three largest manufacturers of pool products, the only ones to offer a full line of such products, to discontinue favorable pricing or sales to rival distributors at the behest of Pool. The manufacturers allegedly agreed to these conditions out of fear of losing access to Pool's irreplaceable distribution network. The contracts also contained most favored nation clauses requiring the manufacturers to give Pool terms at least as favorable as those offered to any other purchasers with the same volume levels as Pool.

The plaintiffs alleged that Pool monopolized and attempted to monopolize the market for the distribution of pool products in the United States and that Pool and that the manufacturers engaged in an unlawful conspiracy to exclude Pool's competitors. Pool and the manufacturers filed motions to dismiss the direct purchasers' claims.

Monopolization

Relevant product market. The court explained that a relevant product market consists of "all products, the use of which is reasonably interchangeable." A relevant geographic market is "the area of effective competition . . . in which the seller operated, and to which a purchaser can practically turn for supplies," with regard to cross-elasticity of demand.

The court initially rejected Pool's contention that the plaintiffs had pled a market definition that was too broad because their definition of "pool products" covered 160,000 products in more than 300 product lines over 40 product categories. The court observed that "courts have upheld product market definitions that include a range of products that are related in the eyes of purchasers and that are marketed together by a particular type of seller." Pool products wholesalers' ability to offer a "full line of pool products with prompt delivery and credit" made them "a distinct and desirable channel of distribution for both manufacturers and pool dealers."

The plaintiffs' market was also not too narrow, even though it did not include other retailers, because the plaintiffs adequately alleged that the wholesaling of pool products was a distinct channel of distribution, in the court's view. The cost savings the wholesalers could provide; their ability to warehouse significant volumes of products; their ability to provide one-stop shopping, timely delivery, and extension of credit; their status as the only feasible source for small dealers that could not purchase in volume from manufacturers; and other factors made them a "unique and essential channel for the efficient distribution" of pool products. Although pool dealers might sometimes purchase directly from manufacturers, distributors could still be their core suppliers. The plaintiffs sufficiently pled facts indicating a lack of interchangeability between pool products sold by distributors and pool products sold in other ways.

Relevant geographic market. The plaintiffs also sufficiently pled a geographic market of the United States. The plaintiffs alleged that pool products are homogenous nationwide. Although Pool operated individual service centers in local markets, it conducted its business and pricing nationally. Pool was the largest nationwide purchaser of pool products, and it had allegedly threatened manufacturers with loss of access to its distribution network nationwide if they did business with new pool products distributors.

Monopoly power. However, the court found that the plaintiffs had not plausibly alleged that Pool had monopoly power in the relevant markets. The court explained that "courts almost never find monopoly power when market share is less than about 50 percent." Here, the plaintiffs did not allege that Pool possessed any particular market share, but the court observed that facts in the complaint suggested "a market share less than 50 percent." The plaintiffs claimed that Pool often represented "30 to 50 percent of a manufacturer's total sales" and that the manufacturer defendants "represent more than 50 percent of sale of pool products at the whole sale distribution level." The allegations did not indicate the amount of distributors for which Pool represented a particular percentage of their sales.

Moreover, the plaintiffs would not have alleged a market share greater than 50 percent even if Pool always made up 50 percent of every manufacturer's sales to distributors. Even if Pool always represented 30 to 50 percent of manufacturers' sales at wholesale, that fact "would allow only the inference that sales though [Pool] represented more than 15 to 25 percent of sales of pool products at the wholesale distribution level." Furthermore, a report cited by the plaintiff stated that Pool "controls approximately one-third of the pure-pool domestic market share sold through distribution," that it faced significant competition in many areas, and that barriers to entry were relatively low.

The court concluded that it could not find monopoly power from Pool's conduct. Although "evidence that a defendant has actually set prices or excluded competition can sometimes establish market power, it was rarely sufficient "without the existence of a high market share," and the plaintiffs' conduct allegations were insufficient considering Pool's apparent "market share in the neighborhood of 33 percent." Therefore the court dismissed the plaintiffs' Section 2 monopolization claim.

Attempted Monopolization

The court explained that attempted monopolization requires allegations that the defendants "(1) engaged in predatory or anticompetitive conduct, (2) with the specific intent to monopolize, and (3) with a dangerous probability of achieving monopoly power."

Dangerous probability of success. The court first concluded that the plaintiffs had shown a "dangerous probability of achieving monopoly power." The court observed that a market share of less than 50 percent could be sufficient for a claim of attempted monopolization. Here, the court considered a 33 percent market share to be consistent with the cited report, allegations in the complaint, and the one-third estimate relied on by Pool in arguing for dismissal of the monopolization claim. A 33 percent market share could be sufficient for a claim of attempted monopolization "when other market factors are present and when a defendant's conduct suggests that actual monopolization is likely."

Here, Pool's pattern of competitor acquisitions indicated that its market share was increasing. Moreover, Pool's alleged status as "the only distributor with national reach," and its far greater number of distribution centers than its closest rival, indicated that competitors were "not likely to have the capacity to increase their output in the short run to a level necessary to compete with Pool." Furthermore, Pool's restrictive agreements with manufacturers "plausibly represent[ed] a barrier to entry for potential rivals."

Exclusionary or anticompetitive conduct. The court also determined that the plaintiffs had engaged in anticompetitive conduct. The plaintiffs' complaint targeted Pool's vertical agreements with manufacturers under which they agreed to discontinue sales to Pool's competitors when Pool requested them to do so. The court explained that alleged anticompetitive conduct "must harm the competitive process and thereby consumers," and that vertical restraints sometimes qualify as anticompetitive conduct, but not on a per se basis. Courts are unlikely to find anticompetitive conduct when they have "offsetting procompetitive benefits or when a restriction is unlikely to foreclose competition in a substantial share of the relevant market."

Here, the court determined that the plaintiffs plausibly alleged that Pool's asserted procompetitive benefit of the agreements—that they "promoted interbrand competition by providing manufacturers with services that increased the value of their products"—did not justify them. The plaintiffs alleged that manufacturers would have preferred to have two or more distributors in each market to ensure competitive service and prices, and that they only agreed to the arrangement to maintain relationship with Pool, a theory the court found to be "supported by the allegation that Pool imposed the restrictive agreements on the manufacturers, not the other way around."

Moreover, Pool had agreements with the three largest manufacturers and many others, and provided the same services to each. Thus, "the arrangements were not likely to increase differentiation and interbrand competition among products of different manufacturers." Furthermore, the plaintiffs plausibly alleged that the agreements "reduce[d] output and increase[d] prices by excluding new entrants and raising existing rivals' costs."

Specific Intent. Finally, the court found the plaintiffs had adequately alleged Pool's specific intent. Specific intent could be inferred from evidence of anticompetitive conduct. Since the plaintiffs had plausibly alleged the anticompetitive agreements, they had also plausibly alleged a specific intent to monopolize.

Sherman Act Section 1 per se violation. The court initially rejected the plaintiffs' claim that Pool and the manufacturer defendants had engaged in a per se illegal group boycott. The court explained that a per se illegal group boycott requires a horizontal agreement among competitors.

Here, although the plaintiffs had alleged an agreement between the manufacturers and Pool, they had not alleged any collusion, or even any contacts, between the manufacturers. Nor could they satisfy "the horizontal agreement requirement by labeling the scheme a hub-and-spoke conspiracy." Such an agreement still required horizontal agreements to create a "wheel."

Sherman Act Section 1 Conspiracy in Restraint of Trade

The court proceeded to analyze the plaintiffs' Section 1 claim under the rule of reason. The court explained that a Sherman Act Section 1 claim requires "(1) a contract, combination, or conspiracy among two or more separate entities that (2) unreasonably retrains trade in a particular market and (3) affects interstate or foreign commerce."

Contract, combination, or conspiracy. The court found the plaintiffs had sufficiently alleged a vertical agreement. The court explained that such an agreement requires "a conscious commitment to a common scheme demonstrated by direct or circumstantial evidence that tends to exclude the possibility of independent action."

Here, the plaintiffs had "alleged more than allegations that Pool announced a unilateral policy to which the manufacturer defendants acquiesced." The plaintiffs alleged that Pool directed the manufacturers not to sell to specific distributors, and that the manufacturers agreed. The fact the manufacturers may have acted under coercion did not negate their agreement. Therefore, the plaintiffs adequately pled conspiracies between Pool and each of the three manufacturer defendants.

Unreasonable restraints of trade. The court also found that the plaintiffs had plausibly alleged that the agreements unreasonably restrained trade. The court explained the question was "whether plaintiffs have alleged enough facts to give rise to the reasonable inference that those impairments occurred, were substantial, and were not outweighed by procompetitive justifications," which required an analysis of "market circumstances."

The court observed that the plaintiffs had adequately alleged that Pool had market power, in a relevant market, as previously discussed with respect to the attempted monopolization claim. Moreover, the plaintiffs sufficiently alleged that the agreements between Pool and the manufacturers would have a substantial impact on the market. The defendant manufacturers were the largest in the industry, were the only full-line manufacturers of pool products, "represent[ed] more that 50 percent of sales of pool products at the wholesale distribution level," and the sale of their products was "essential to compete effectively as a distributor."

Moreover, the plaintiffs sufficiently alleged that each of the manufacturer defendants' agreements with Pool would likely result in an anticompetitive effect that harmed competition. The plaintiffs alleged the agreements excluded Pool's competitors in a manner considered anticompetitive in the absence of procompetitive benefits. Pool's imposition of the agreements on the manufacturers made such procompetitive benefits "unlikely." Further, the plaintiffs alleged that the agreements restricted output and denied supplies to Pool's rivals.

Antitrust injury. The court found that the plaintiffs had adequately alleged an antitrust injury, defined as injuries "of the type that the antitrust laws were intended to prevent." The plaintiffs alleged that the agreements decreased output, permitted Pool to charge supracompetitive prices, raised costs to Pool's competitors, and forced some rivals out of business, harms of the type "that the antitrust laws are meant to prevent."

Timeliness and fraudulent concealment. However, the court found the plaintiffs could only recover for overcharges for pool products within the four-year limitations period. The court explained that the Clayton Act statute of limitations barred "claims for overcharges outside of the four-year period unless fraudulent concealment applies." Fraudulent concealment requires "first, that the defendants concealed the conduct complained of, and second, that the plaintiffs failed, despite the exercise of due diligence, to discover the facts that form the basis of the claims."

The court rejected the plaintiffs' contention that the agreements were a "secret quid pro quo" between Pool and the manufacturer defendants. Allegations in the complaint indicated that the agreements were not secret, and the plaintiffs did not make "specific allegations that Pool and the manufacturers attempted to keep their agreements secret, or even intended their agreements to be secret." Moreover, even if the defendants had not disclosed their agreements, "failure to self disclose anticompetitive conduct does not amount to fraudulent concealment." The court also observed that the Fifth Circuit had rejected the argument asserted by the plaintiffs "that a defendant is subject to fraudulent concealment when it engages in conduct that purports to be competitive when in fact it is collusive."

Finally, the plaintiffs had not alleged a self-concealing antitrust violation. A self-concealing violation is one "in which deception is an essential element for some purpose other than merely to cover up that act." The plaintiffs' allegations indicated that the "alleged agreements between Pool and the manufacturers were disclosed to Pool's rivals."

The case is MDL No. 2328.

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

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

MainStory: TopStory Antitrust LouisianaNews

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