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From Antitrust Law Daily, May 9, 2018

Drink company failed to adequately plead injury to competition, market power

By Peter Reap, J.D., LL.M.

In its lawsuit alleging violations of the Sherman Act, the Clayton Act, and related state laws against energy drink maker Monster Beverage Company, Hip Hop Beverage Corporation (HHBC) failed to adequately plead injury to competition, as is required to state a violation of the Sherman Act or the Clayton Act, the U.S. Court of Appeals in San Francisco has decided. Moreover, HHBC also failed to adequately plead Monster’s market power, as is required to state a claim under the Sherman or Clayton Acts. Thus, the dismissal of the suit by the federal district court in Los Angeles was affirmed (Hip Hop Beverage Corp. v. Monster Energy Co., May 7, 2018, Boggs, D.).

HHBC, the maker of competing Pit Bull Energy products, alleged that Monster violated the antitrust laws through its exclusive dealing agreements with brokers for the management and distribution of its products at Military Resale System (MRS) exchanges, commissaries, and stores. It claimed that Monster exploited its exclusive relationships with "sub-brokers," who are responsible for merchandising and product inventory at the commissary level, to prevent it from retaining a master broker and effectively competing in the energy drink market within the MRS.

Owing to the complexities of the U.S. Defense Commissary Agency’s purchasing and stocking process, manufacturers seeking to supply products to the military resale market typically required a master broker to coordinate and present the products to the agency, then to manage introduction and distribution in the market, the plaintiff alleged. Master brokers often utilize sub-brokers as their physical connection to the stores.

HHBC averred that when one sub-broker that worked with Monster instructed its master broker that it would terminate their relationship unless the master broker cancelled its Pit Bull contract, it simply did so. This happened repeatedly, HHBC asserted. By controlling the only available brokers necessary to reach the consumers, leaving HHBC and other competitors unable to deliver their products to customers, Monster allegedly controlled the relevant market, according to HHBC.

Injury. While HHBC’s amended complaint pleaded some injury to itself, it fell short of pleading injury to competition generally, the Ninth Circuit determined. Mere injury to HHBC’s position as a market competitor was not sufficient. In a case alleging an exclusive-dealing arrangement, HHBC needed to plead that the arrangement "foreclose[d] competition in a substantial share of the line of commerce affected." Omega Envtl., Inc. v. Gilbarco, Inc., 127 F.3d 1157, 1162 (9th Cir. 1997). "If competitors can reach the ultimate consumers . . . by employing . . . alternative channels of distribution, it is unclear whether such restrictions foreclose from competition any part of the relevant market." Omega, 127 F.3d at 1163.

HHBC alleged that (at most) four brokers refused to do business with HHBC due to Monster’s conduct. But HHBC did not allege how many total brokers were in the market in order to establish that Monster foreclosed competition. Moreover, HHBC conceded that HHBC remained in the market without the assistance of brokers. HHBC’s conclusory assertion that consumer prices had been driven upward was insufficient because HHBC did not allege any specific pricing data or explain how the market price supposedly increased, the court explained.

Market power. A firm has market power when, "by restricting its own output, it can restrict marketwide output and, hence, increase marketwide prices." Rebel Oil Co., Inc. v. Atl. Richfield Co., 51 F.3d 1421, 1434 (9th Cir. 1995). To allege market power circumstantially, the plaintiff must: "(1) define the relevant market, (2) show that the defendant owns a dominant share of that market, and (3) show that there are significant barriers to entry and show that existing competitors lack the capacity to increase their output in the short run." Ibid.

While HHBC’s amended complaint properly defined the relevant market, it did not sufficiently allege that Monster had a dominant share of that market or that existing competitors lacked the capacity to increase their output to offset Monster’s conduct, according to the appellate court. The amended complaint merely stated that Monster controlled a "major percent" of the energy-drink market and did not allege that other "entrenched" competitors such as Red Bull and Rockstar were unable to increase their output to offset Monster’s alleged conduct.

State claims. The appellate court also affirmed the dismissal of HHBC’s related state-law claims, including interference with contractual relations, because they were derivative of the Sherman Act and Clayton Act claims. Finally, the district court did not err in dismissing HHBC’s amended complaint with prejudice, because the amended complaint failed to cure or meaningfully address the deficiencies noted by the district court.

The case is No. 16-56757.

Attorneys: Carlos A. De La Paz (Rostam Law, Inc.) for Hip Hop Beverage Corp. Dan Marmalefsky (Morrison & Foerster LLP) and Tanya Schierling (Solomon Ward Seidenwurm & Smith LLP) for Monster Energy Co.

Companies: Hip Hop Beverage Corp.; Monster Energy Co.

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