On Monday, March 21, 2016, the Supreme Court denied certiorari in McWane v. FTC, leaving the Eleventh Circuit’s 2015 decision undisturbed. While the decision not to grant certiorari was not surprising—after all, the Supreme Court hears relatively few cases—it is disappointing that the Supreme Court will not weigh in on the important issues raised by the case.
McWane is an Alabama-based ductile iron pipe fittings manufacturer, and, from April 2006 until late 2009, it was the only supplier of domestically-produced fittings. End users of fittings issue either “open specifications,” which permit the use of fittings manufactured anywhere in the world, or “domestic specifications,” which require the use of fittings manufactured in the United States. In 2009, Congress enacted the American Recovery and Reinvestment Act, which allocated funds to water infrastructure projects and increased the demand for domestic fittings. Soon after, another fitting supplier, Star Pipe Products, announced that it would also offer domestic fittings.
In response to Star’s announcement, McWane modified its rebate policy. Under the new policy, distributors who bought domestic fittings from companies other than McWane might lose their rebates or be cut off from purchasing McWane’s domestic fittings for up to three months. Despite the new policy, Star gained about 5% of the domestic fittings market in its first year, about 10% in its second year, and was on pace for its best year ever in its third year, though it estimated its sales would have been even greater had the rebate policy not been modified.
Both the FTC and the Eleventh Circuit found that McWane’s conduct violated the FTC Act, finding that McWane was a monopolist whose exclusive-dealing program foreclosed a substantial share of the market.
McWane’s petition to the Supreme Court raised two questions. First, can a court find exclusive dealing unlawful when a competitor was able to successfully enter the relevant market during the time period at issue? Second, can a court find exclusive dealing unlawful when there is a “nonexclusionary business justification for the conduct”?
Entrance by a Competitor
McWane argued that without the power to exclude new competitors from the relevant market, it is inconceivable that an alleged monopolist can control price. New competitors can enter, sell their own products at a discount, and drive down the incumbent’s prices. McWane cited cases from the Second and Ninth Circuits in support, arguing that these circuits have found successful entry by a competitor to refute a finding of monopoly power. Since Star was able to enter the domestic fitting markets and rapidly earn 10% of the relevant market, McWane could not have had monopoly power.
McWane therefore rejected the Eleventh Circuit’s reliance on McWane’s high percentage of market share and the allegedly “large capital outlays required to enter” the market, noting that the question is whether McWane can retain that market share in the face of entry and that Star was able to enter the market without acquiring its own foundries. McWane further rejected the Eleventh Circuit’s speculation about what would have happened if the rebate policy had not been modified, arguing that the court improperly relied on lay testimony.
In response, the FTC stated that the standard requires “successful” or “substantial” entry into the domestic market and that Star had achieved neither, as Star’s entry had no constraining effect on McWane’s prices. Moreover, the FTC claimed that McWane almost immediately softened its rebate policy when the FTC announced its investigation, which reduces the probative value of Star’s increasing market share.
Additionally, the FTC rejected McWane’s characterization of the Second and Ninth Circuit case law. It argued that those cases weighed many factors in deciding that the defendant lacked monopoly power and did not rely solely on the finding that a single competitor had entered the market.
Nonexclusionary Business Justification
McWane cited the Supreme Court decisions of Aspen Skiing Co. v. Aspen Highlands Skiing Corp. and Eastman Kodak Co. v. Image Technical Services, Inc. for the proposition that defendant need only show a “normal business purpose” or “legitimate competitive reasons” (i.e., something other than the opportunity to charge monopoly prices in the future) to defeat a monopolization claim. It said that First, Seventh, Eighth and Tenth Circuits all require nothing more than a “reasonable business justification,” while only the Third and Eleventh Circuits require an additional showing of affirmative benefit to consumers.
McWane argued that it has presented such reasonable business justifications: “(1) making efficient use of considerable excess production capacity at its Alabama foundry, and (2) limiting the likelihood that it would bear the expense of carrying a full range of pipe fittings and accessories only to have its core offerings ‘cherrypicked’ by competitors who opted to limit production to the most popular fittings.” It rejected the Eleventh Circuit’s characterization of these justifications as “pretextual,” arguing that contemporaneous documents that showed a desire to beat out its rival did not negate McWane’s otherwise valid business justification.
In response, the FTC stated that McWane’s documents did not just show a desire to prevail over Star. Instead, the documents revealed a fear that if Star stayed in the market, customers would demand lower prices. According to the FTC, a desire to preserve monopoly profits is not a valid business justification.
Moreover, the FTC argued that McWane has applied the wrong legal standard. Aspen Skiing and Eastman Kodak were cases where a monopolist refused to deal with its rivals. In such cases, a mere desire to advance one’s own business interests might suffice. But here, McWane attempted to exclude a rival and therefore needed to prove a procompetitive justification for its conduct. As McWane has not claimed that its actions lowered prices, improved service or quality or otherwise benefited consumers, McWane could not make such a showing.
Amicus briefs in support of McWane’s petition were filed by a group of U.S. professors of law and economics, by the states of Alabama and Oklahoma, and by the Chamber of Commerce of the United States and the National Association of Manufacturers, raising additional arguments in favor of certiorari.
The professors argued that, while the Supreme Court has generally “ushered in an era of modern antitrust jurisprudence,” the law on exclusive dealing has been left behind. Lower courts are applying standards in such cases that do not comport with modern economic scholarship, and so the law and economics professors urged the Court to take this opportunity to modernize exclusive dealing law.
The Chamber of Commerce of the United States and the National Association of Manufacturers similarly argued that exclusive-dealing arrangements are beneficial to both suppliers and distributors and that uncertainty in exclusive dealing law has a tendency to chill pro-competitive conduct, necessitating Supreme Court guidance.
Finally, the states of Alabama and Oklahoma argued that the circuit splits identified by McWane harmed American manufacturers, both domestically and internationally. Within the United States, a manufacturer in the Eleventh Circuit might risk antitrust liability for an exclusive dealing policy that might be permissible another circuit, putting that manufacturer at a disadvantage. Internationally, American manufacturers are less able to compete when there is uncertainty about how they can legally respond to competition from abroad.
With the decision not to grant certiorari, the issues raised by the McWane petition and amicus briefs remain unresolved, and antitrust practitioners will continue to wait for Supreme Court guidance on the law of exclusive dealing.