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From Antitrust Law Daily, April 16, 2015

Pipe fittings producer illegally maintained monopoly power

By Greg Hammond, J.D.

A ductile iron pipe fittings producer’s requirement that distributors purchase all their domestic pipe fittings from the producer—and other actions—constituted an illegal exclusive dealing policy used to maintain monopoly power in the domestic fittings market. The U.S. Court of Appeals in Atlanta affirmed an FTC order that directed the producer to stop requiring exclusivity from distributors, agreeing with the Commission’s findings concerning market definition, monopolization in the domestic fittings market, and harm to competition (McWane, Inc. v. FTC, April 15, 2015, Marcus, S.).

Background. McWane, Inc. is a family-run company that produces ductile iron pipe fittings. It is the dominant producer of domestic pipe fittings, holding 100 percent of the market for domestic-only projects between 2006 and 2009, 95 percent in 2010, and 90 percent in 2011. After Star Pipe Products entered the domestic fittings market in 2009, McWane imposed the “Full Support Program,” informing its distributors that unless they purchased all of their domestic fittings from McWane, with certain exceptions, they would lose their rebates and be cut off from purchases for 12 weeks.

The FTC brought an enforcement action under Section 5 of the FTC Act, and after a two-month trial, the Administrative Law Judge found that McWane’s actions constituted an illegal exclusive dealing policy used to maintain its monopoly power in the domestic fittings market. The FTC subsequently affirmed the decision and issued an order demanding that McWane stop requiring exclusivity from distributors.

McWane appealed the FTC’s order, challenging three FTC determinations concerning: (1) market definition; (2) a finding that McWane monopolized the domestic fittings market; and (3) a finding that the Full Support Program harmed competition.

Market definition. Agreeing with the Administrative Law Judge, the Commission found that the relevant market was one “for the supply of domestically-manufactured fittings for use in…projects with domestic-only specifications.” McWane challenged the relevant market definition on appeal, arguing that domestic and imported fittings are interchangeable and that the definition was unsupported by an expert economic test. Given the identification of persistent price differences between domestic fittings and imported fittings, however, and the distinct customers and lack of reasonable substitutes in this case, there was sufficient evidence to support the Commission’s market definition.

Monopoly power. The Commission also agreed that McWane’s ability to control prices in the market provided direct evidence of its monopoly power. The appellate court, however, noted that circumstantial evidence did not necessarily “point in the same direction” as the direct evidence because Star was able to enter the domestic fittings market and expand its market share from zero to 10 percent between 2009 and 2011, while McWane’s market share correspondingly declined. Nevertheless, the court found that given McWane’s 90 percent market share, the large capital investments required to enter the domestic fittings market, and McWane’s “undeniable continued power over domestic fittings prices,” there was sufficient evidence for a reasonable mind to accept the Commission’s conclusion that McWane had monopoly power.

Maintenance of monopoly. Lastly, McWane challenged the Commission’s finding that the Full Support Program was an exclusive dealing policy designed to maintain McWane’s monopoly power by impairing the ability of rivals to grow into effective competitors that might erode the firm’s dominant position. Specifically, McWane argued: (1) the Full Support Program was “presumptively legal” because it was non-binding and short-term; (2) the government failed to carry its burden of demonstrating harm to competition; and (3) the Commission wrongly rejected its proffered procompetitive justifications.

The court disagreed with all three of McWane’s arguments, finding that the Full Support Program was “unilaterally imposed” against all distributors, the program was implemented in order for McWane to become the exclusive supplier, and no discount, rebate, or other consideration was offered in exchange for exclusivity.

Direct pricing evidence and indirect evidence supported a finding of harm to competition because McWane raised prices and increased gross profits shortly after Star entered the market. Since McWane was an incumbent monopolist already charging supracompetitive prices, evidence that its prices did not fall was deemed consistent with a reasonable inference that its Full Support Program significantly contributed to maintaining McWane’s monopoly power. Record evidence also demonstrated that the program stunted Star’s growth, preventing it from emerging as an effective competitor who could challenge McWane’s supracompetitive prices. Lastly, emails and correspondence among McWane executives revealed a deliberate plan to prevent Star from “reaching any critical market mass” to avoid the “erosion of domestic pricing if Star emerges as a legitimate competitor.” There was consequently substantial evidence to support the Commission’s conclusion that the Full Support Program harmed competition.

McWane offered two procompetitive justifications for its Full Support Program: (1) the program was necessary to retain enough sales to keep its domestic foundry afloat; and (2) the program was needed to keep Star from “cherry-picking” the core of the domestic fittings business by making only the top few dozen fittings that account for roughly 80 percent of all fittings sold. Neither argument was convincing because McWane’s actions were not the type taken to increase overall market output, and McWane failed to offer any reason for the court to find that market conditions exist that would allow Star to “cherry-pick” the core of the domestic fittings business. Further, McWane’s internal documents revealed discussions between executives concerning the Full Support Program in terms of maintaining domestic prices and profitability by preventing Star from becoming an effective competitor. The Commission’s findings were therefore supported by substantial evidence.

The case number is 14-11363.

Attorneys: Heather Souder Choi (Baker Botts, LLP) and Thomas W. Thagard, III (Maynard Cooper & Gale, PC) for McWane, Inc. Theodore Paul Metzler, Jr. for FTC.

Companies: McWane, Inc.

MainStory: TopStory Antitrust FederalTradeCommissionNews AlabamaNews FloridaNews GeorgiaNews

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