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From Antitrust Law Daily, August 26, 2015

Guitar hub-and-spoke conspiracy claim falls flat

By Greg Hammond, J.D.

A group of guitar and amplifier purchasers failed to vocalize a price fixing conspiracy claim against a retailer, five manufacturers, and a trade association. The U.S. Court of Appeals in San Francisco affirmed an order dismissing the Section 1 Sherman Act claim, finding that alleged parallel conduct and several “plus” factors were insufficient to provide a plausible basis to infer the existence of horizontal agreements (In re Musical Instruments and Equipment Antitrust Litigation, August 25, 2015, Bea, C.).

Following the issuance of an FTC consent decree against the National Association of Music Merchants (NAMM), various purchasers of guitars and guitar amplifiers filed complaints alleging that NAMM, Guitar Center, Inc., and five manufacturers—including Fender Music Instruments Corp., Gibson Guitar Corp., Yamaha Corp. of America, Hoshino U.S.A., Inc., and Kaman Music Corp.—engaged in a hub-and-spoke conspiracy to fix the prices of guitars and amplifiers in violation of Section 1 of the Sherman Act and state antitrust laws. After 18 of these cases were centralized in the Southern District of California, the district court dismissed the price fixing claim for failure to state a claim. The plaintiffs timely appealed.

The question before the appellate court was whether the plaintiffs pleaded sufficient facts to provide a plausible basis from which the court could infer alleged horizontal price fixing agreements among the defendant manufacturers. The guitar purchasers claimed that parallel conduct in adopting minimum-advertised-price policies (MAP policies), along with six “plus factors,” suggested the existence of horizontal agreements. The court considered each of the six plus factors alleged in the purchasers’ complaint: (1) defendants shared a common motive to conspire; (2) the manufacturer defendants acted against their self-interest; (3) the manufacturer defendants simultaneously adopted substantially similar MAP polices; (4) the FTC’s investigation and consent decree; (5) the defendants’ participation in NAMM; and (6) retail prices for guitars and guitar amplifiers rose during the class period as the number of units sold fell.

The appellate court rejected the purchasers’ arguments, first finding that common motive to conspire simply restates that a market is interdependent, which does not entail collusion. Second, manufacturers’ decisions to heed demands made by a common, important customer—Guitar Center in this case—support self-interested independent parallel conduct in an interdependent market, not a conspiracy or collusion. Third, according to the complaint the MAP policies were adopted over a period of several years, not simultaneously. Even if the progressive adoption of similar policies constitutes simultaneity, the court determined that it would not reveal anything more than similar reaction to similar pressures within an interdependent market, or conscious parallelism. Fourth, The FTC Act does not require a showing of a contract, combination, or conspiracy, as is required under a Section 1 Sherman Act claim. Fifth, the court found that mere participation in trade-organization meetings where information is exchanged and strategies are advocated does not suggest an illegal agreement.

Lastly, the court determined that there was no basis from which it could infer an illegal agreement to increase prices because the plaintiffs failed to allege that the average retail price of guitars and amplifiers manufactured by defendants rose during the class period; and the alleged increase in average retail price involved all guitars and guitar amplifiers sold, including products outside the relevant product market. Such a price increase, according to the court, was no more suggestive of collusion than it was of any other potential cause.

The dissent argued that, when analyzed together, the plus factors plausibly suggested an illicit horizontal agreement was made between the manufacturer defendants. The majority disagreed, finding that the complaint asserted that Guitar Center used its substantial market power to pressure each manufacturer to adopt similar policies and that each manufacturer adopted those policies as in its own interest. Although this conduct may be anticompetitive, the majority posed, it did not suggest the manufacturers illegally agreed among themselves to restrain competition.

The case number is 12-56674.

Attorneys: Daniel C. Girard (Girard Gibbs LLP) for Plaintiffs-Appellants. Margaret M. Zwisler (Latham & Watkins LLP) for Guitar Center, Inc. Daniel A Sasse (Crowell & Moring LLP) for Yamaha Corp. of America. Paul C. Cuomo (Baker Botts LLP) and Robert G. Abrams (Baker & Hostetler LLP) for National Association of Music Merchants, Inc. Neil G. Epstein (Eckert Seamans Cherin & Mellott, LLC) and Christopher M. Young (DLA Piper LLP) for Hoshino U.S.A., Inc. Lawrence G. Scarborough (Bryan Cave LLP) for Fender Musical Instruments Corp. and Kaman Music Corp. Tim Harvey (Riley Warnock & Jacobson, PLC) for Gibson Guitar Corp.

Companies: Guitar Center, Inc.; Guitar Center Stores, Inc.; Yamaha Corp. of America; National Association of Music Merchants, Inc.; Hoshino U.S.A., Inc.; Fender Musical Instruments Corp.; Kaman Music Corp.; Gibson Guitar Corp.

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