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From Antitrust Law Daily, February 19, 2016

Evidence permits inference drywall manufacturers conspired to raise prices

By Greg Hammond, J.D.

Direct and indirect purchasers of drywall presented sufficient evidence to permit an inference that four drywall manufacturers reached an agreement to raise prices and eliminate job quotes, in violation of the antitrust laws, according to the federal district court in Philadelphia. The court consequently denied the manufacturers’ motions for summary judgment (In re Domestic Drywall Antitrust Litigation, February 18, 2016, Baylson, M.).

The drywall industry is oligopolistic, in that the defendants account for more than 89 percent of U.S. drywall sales, and the four largest defendants—USG, National, CertainTeed, and American—account for approximately 70 percent of those sales. The plaintiffs claimed that beginning in 2011, the manufacturers violated the antitrust laws by conspiring to raise prices, restrict supply, and eliminate the long-standing pricing practice of providing job quotes. Conversely, the five remaining defendant manufacturers—Lafarge North America Inc., CertainTeed Gypsum, PABCO Building Products, LLC, New NGC, Inc. (National), and American Gypsum Company LLC—moved for summary judgment.

In support of their motions for summary judgment, the manufacturers claimed that the undisputed evidence revealed that the manufacturers were merely “following the leader,” which they argued was an expected and legal business practice in an oligopoly. The court noted that to create a fact issue about whether the manufacturers entered into an agreement, the purchasers were required to present evidence tending to exclude the possibility of independent conduct, including interdependent conduct. Further, plaintiffs could demonstrate that the manufacturers’ parallel conduct was attributable to an agreement, rather than interdependence, by showing three elements: (1) the manufacturers’ behavior was parallel; (2) the manufacturers were conscious of each other’s conduct and awareness was an element in their decision-making process; and (3) plus factors showing an actual agreement, including motive, actions contrary to the manufacturers’ interests, and traditional conspiracy evidence.

The manufacturers essentially conceded the first two elements in their argument that they were not liable because they were merely following the leader, the court noted. In particular, the court found that implicit in such a defense was that the manufacturers’ behavior was parallel, that they were conscious of each other’s conduct, and that awareness was an element in their decision-making processes. The dispute in this case consequently centered on whether the plaintiffs’ evidence was sufficient for a jury to find “plus factors” indicating an agreement, the court stated.

Motive. First, the court determined that it could not be seriously contested that a jury could find that the manufacturers had the motive to enter an agreement to raise prices. The manufacturers’ own documents were littered with references to their poor financial performance and the “dire straits of the industry,” according to the court. In addition, the plaintiffs’ expert concluded that the market structure in the paper-backed gypsum wallboard industry was conducive to the alleged cartel.

Actions against self-interest. Second, despite the manufacturers’ declarations and briefs stating that all of their actions were taken in their economic self-interest, the court found that the following actions could be found by the fact finder to be against the manufacturers’ self-interest, along with other evidence: (1) announcing a 35 percent price increase despite a lack of meaningful increase in demand; (2) eliminating job quotes; and (3) artificially limiting supply. In particular, there was substantial evidence from which a jury could conclude that the dramatic increase in price was not correlated with any changes in cost or demand. In addition, the court found that a jury could consider the manufacturers’ decision to eliminate job quotes to have been against each manufacturer’s self-interest because the manufacturers were eliminating a major competitive tool and risked that any one of the other manufacturers would continue quoting jobs and steal substantial market share. Lastly, the court noted that by limiting the amount of product the manufacturers were willing to sell to their customers, the manufacturers were risking that their customers would go elsewhere.

Traditional conspiracy evidence. Lastly, the court concluded that the purchaser plaintiffs submitted sufficient traditional conspiracy evidence for a jury to conclude that American, National, PABCO, and Lafarge entered into an agreement in violation of the Sherman Act, including: (1) an American vice-president’s email indicating that there might be “a movement from all manufacturers to eliminate quotes,” which was written a few weeks after all of the defendants sent representatives to a Las Vegas trade meeting; (2) notes from a call between a Lafarge executive and an analyst, indicating that National, Lafarge, and CertainTeed would react to certain price moves by USG; and (3) notes from a meeting between National executive and another analyst indicating that there were verbal agreements for a large price increase in 2013. Lastly, the court noted that due to evidence that job quotes had been a feature in the drywall industry since the 1980s and that all of the defendant manufacturers eliminated this practice within weeks of each other in the fall of 2011, a jury might be justified in concluding that the manufacturers’ shift in behavior was radical enough to contribute to the inference of conspiracy.

CertainTeed. Unlike American, National, PABCO, and Lafarge, the court found that there was a lack of evidence of any communications by CertainTeed or other plus factors that could create the inference of conspiracy. A sudden abrupt change in business practices and evidence that other firms in the drywall industry entered into an agreement and that CertainTeed acted consistent with the other firms’ actions were insufficient for a jury to be justified in concluding that CertainTeed entered an agreement, the court found. CertainTeed’s motion for summary judgment was therefore granted.

The case is No. 13-MD-2437.

Attorneys: Rachel Ezzell (Dechert LLP) for New NGC, Inc. David L. Hanselman (McDermott Will & Emery LLP) and Thomas S. Brown (Butler Pappas Weihmuller Katz Craig LLP) for American Gypsum Company LLC and Eagle Materials Inc. J. Mark Gidley (White & Case LLP) for CertainTeed Gypsum, Inc. Bradley C. Weber (Locke Lord LLP) for PABCO Building Products, LLC. Mark W. Nelson (Cleary Gottlieb Steen & Hamilton LLP) for Lafarge North America Inc.

Companies: Lafarge North America Inc.; CertainTeed Gypsum; PABCO Building Products, LLC; New NGC, Inc.; American Gypsum Company LLC

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