ZF Meritor LLC v. Eaton Corporation , 696 F.3d 254 ( 2012 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
______
Nos. 11-3301 and 11-3426
______
ZF MERITOR, LLC;
MERITOR TRANSMISSION CORPORATION,
Appellants, No. 11-3426
v.
EATON CORPORATION,
Appellant, No. 11-3301
______
On Appeal from the United States District Court
for the District of Delaware
(D.C. No. 1-06-cv-00623)
District Judge: Honorable Sue L. Robinson
______
Argued June 26, 2012
Before: FISHER and GREENBERG, Circuit Judges,
and OLIVER,* District Judge.
*
The Honorable Solomon Oliver, Jr., Chief Judge of
the United States District Court for the Northern District of
Ohio, sitting by designation.
(Filed: September 28, 2012 )
Caeli A. Higney
Thomas G. Hungar
Theodore B. Olson (Argued)
Cynthia E. Richman
Geoffrey C. Weien
Gibson, Dunn & Crutcher
1050 Connecticut Avenue, N.W., 9th Floor
Washington, DC 20036
Erik T. Koons
William K. Lavery
Joseph A. Ostoyich
Baker Botts
1299 Pennsylvania Avenue, N.W.
The Warner
Washington, DC 20004
Donald E. Reid
Morris, Nichols, Arsht & Tunnell
1201 North Market Street
P.O. Box 1347
Wilmington, DE 19899
Counsel for Eaton Corporation
Jay N. Fastow (Argued)
Dickstein Shapiro
1633 Broadway
New York, NY 10019
2
Robert B. Holcomb
Adams Holcomb
1875 Eye Street. N.W., Suite 810
Washington, DC 20006
Christopher H. Wood
1489 Steele Street, Suite 111
Denver, CO 80206
Counsel for ZF Meritor, LLC and
Meritor Transmission Corp.
Michael S. Tarringer
Cafferty Faucher
1717 Arch Street, Suite 3610
Philadelphia, PA 19103
Counsel for American Antitrust
Institute
______
OPINION OF THE COURT
______
FISHER, Circuit Judge.
This case arises from an antitrust action brought by ZF
Meritor, LLC (―ZF Meritor‖) and Meritor Transmission
Corporation (―Meritor‖) (collectively, ―Plaintiffs‖) against
Eaton Corporation (―Eaton‖) for allegedly anticompetitive
practices in the heavy-duty truck transmissions market. The
practices at issue are embodied in long-term agreements
3
between Eaton, the leading supplier of heavy-duty truck
transmissions in North America, and every direct purchaser of
such transmissions. Following a four-week trial, a jury found
that Eaton‘s conduct violated Section 1 and Section 2 of the
Sherman Act, and Section 3 of the Clayton Act. Eaton filed a
renewed motion for judgment as a matter of law, arguing that
its conduct was per se lawful because it priced its products
above-cost. The District Court disagreed, reasoning that
notwithstanding Eaton‘s above-cost prices, there was
sufficient evidence in the record to establish that Eaton
engaged in anticompetitive conduct—specifically that Eaton
entered into long-term de facto exclusive dealing
arrangements—which foreclosed a substantial share of the
market and, as a result, harmed competition. We agree with
the District Court and will affirm the District Court‘s denial
of Eaton‘s renewed motion for judgment as a matter of law.
We are also called upon to address several other
issues. Although the jury returned a verdict in favor of
Plaintiffs on the issue of liability, prior to trial, the District
Court granted Eaton‘s motion to exclude the damages
testimony of Plaintiffs‘ expert. The District Court also denied
Plaintiffs‘ request for permission to amend the expert report
to include alternate damages calculations. Consequently, the
issue of damages was never tried and no damages were
awarded. Plaintiffs cross-appeal from the District Court‘s
order granting Eaton‘s motion to exclude and the District
Court‘s subsequent denial of Plaintiffs‘ motion for
clarification. For the reasons set forth below, we will affirm
the District Court‘s orders to the extent that they excluded
Plaintiffs‘ expert‘s testimony based on the damages
4
calculations in his initial expert report, but reverse to the
extent that the District Court denied Plaintiffs‘ request to
amend the report to submit alternate damages calculations.
Finally, although the District Court awarded no damages, it
did enter injunctive relief against Eaton. On appeal, Eaton
argues that Plaintiffs lack standing to seek injunctive relief
because they are no longer in the heavy-duty truck
transmissions market, and have expressed no concrete desire
to re-enter the market. We agree and will vacate the District
Court‘s order issuing injunctive relief.
I. BACKGROUND
A. Factual Background
1. Market Background
The parties agree that the relevant market in this case
is heavy-duty ―Class 8‖ truck transmissions (―HD
transmissions‖) in North America. Heavy-duty trucks include
18-wheeler ―linehaul‖ trucks, which are used to travel long
distances on highways, and ―performance‖ vehicles, such as
cement mixers, garbage trucks, and dump trucks. There are
three types of HD transmissions: three-pedal manual, which
uses a clutch to change gears; two-pedal automatic; and two-
or-three-pedal automated mechanical, which engages the
gears mechanically through electronic controls. Linehaul and
performance transmissions, which comprise over 90% of the
5
market, typically use manual or automated mechanical
transmissions.1
There are only four direct purchasers of HD
transmissions in North America: Freightliner, LLC
(―Freightliner‖), International Truck and Engine Corporation
(―International‖), PACCAR, Inc. (―PACCAR‖), and Volvo
Group (―Volvo‖). These companies are referred to as the
Original Equipment Manufacturers (―OEMs‖). The ultimate
consumers of HD transmissions, truck buyers, purchase
trucks from the OEMs. Truck buyers have the ability to
select many of the components used in their trucks, including
the transmissions, from OEM catalogues called ―data books.‖
Data books list the alternative component choices, and
include a price for each option relative to the ―standard‖ or
―preferred‖ offerings. The ―standard‖ offering is the
component that is provided to the customer unless the
customer expressly designates another supplier‘s product,
while the ―preferred‖ or ―preferentially-priced‖ offering is the
lowest priced component in data book among comparable
products. Data book positioning is a form of advertising, and
standard or preferred positioning generally means that
customers are more likely to purchase that supplier‘s
components. Although customers may, and sometimes do,
request components that are not published in a data book,
doing so is often cumbersome and increases the cost of the
1
A third category of heavy-duty trucks, ―specialty‖
vehicles, such as fire trucks, typically use automatic
transmissions.
6
component. Thus, data book positioning is essential in the
industry.
Eaton has long been a monopolist in the market for
HD transmissions in North America.2 It began making HD
transmissions in the 1950s, and was the only significant
manufacturer until Meritor entered the market in 1989 and
began offering manual transmissions primarily for linehaul
trucks. By 1999, Meritor had obtained approximately 17% of
the market for sales of HD transmissions, including 30% for
linehaul transmissions. In mid-1999, Meritor and ZF
Friedrichshafen (―ZF AG‖), a leading supplier of HD
transmissions in Europe, formed the joint venture ZF Meritor,
and Meritor transferred its transmissions business into the
joint venture.3 Aside from Meritor, and then ZF Meritor, no
significant external supplier of HD transmissions has entered
the market in the past 20 years.4
One purpose of the ZF Meritor joint venture was to
adapt ZF AG‘s two-pedal automated mechanical
2
At trial, Eaton disputed that it was a monopolist, but
on appeal, does not challenge the jury‘s finding that it
possessed monopoly power in the HD transmissions market
in North America.
3
ZF AG is not a party to this lawsuit.
4
―External‖ transmission sales do not include
transmissions manufactured by Volvo Group for use in its
own trucks.
7
transmission, ASTronic, which was used exclusively in
Europe, for the North American market. The redesign and
testing took 18 months, and ZF Meritor introduced the
adapted ASTronic model into the North American market in
2001 under the new name FreedomLine. FreedomLine was
the first two-pedal automated mechanical transmission to be
sold in North America.5 When FreedomLine was released,
Eaton projected that automated mechanical transmissions
would account for 30-50% of the market for all HD
transmission sales by 2004 or 2005.
2. Eaton’s Long-Term Agreements
In late 1999 through early 2000, the trucking industry
experienced a 40-50% decline in demand for new heavy-duty
trucks. Shortly thereafter, Eaton entered into new long-term
agreements (―LTAs‖) with each OEM. Although long-term
supply contracts were not uncommon in the industry, and
were also utilized by Meritor in the 1990s, Eaton‘s new LTAs
were unprecedented in terms of their length and coverage of
the market. Eaton signed LTAs with every OEM, and each
LTA was for a term of at least five years.
Although the LTAs‘ terms varied somewhat, the key
provisions were similar. Each LTA included a conditional
rebate provision, under which an OEM would only receive
rebates if it purchased a specified percentage of its
5
Eaton did not produce a two-pedal automated
mechanical transmission at the time, and would not fully
release one until 2004.
8
requirements from Eaton.6 Eaton‘s LTA with Freightliner,
the largest OEM, provided for rebates if Freightliner
purchased 92% or more of its requirements from Eaton.7
Under Eaton‘s LTA with International, Eaton agreed to make
an up-front payment of $2.5 million, and any additional
rebates were conditioned on International purchasing 87% to
97.5% of its requirements from Eaton. The PACCAR LTA
provided for an up-front payment of $1 million, and
conditioned rebates on PACCAR meeting a 90% to 95%
market-share penetration target. Finally, Eaton‘s LTA with
Volvo provided for discounts if Volvo reached a market-share
penetration level of 70% to 78%.8 The LTAs were not true
6
We will refer to these as ―market-share‖ discounts or
―market-penetration‖ discounts. It is important to distinguish
such discounts from quantity or volume discounts. Quantity
discounts provide the buyer with a lower price for purchasing
a specified minimum quantity or volume from the seller. In
contrast, market-share discounts grant the buyer a lower price
for taking a specified minimum percentage of its purchases
from the seller. Phillip E. Areeda & Herbert Hovenkamp,
Antitrust Law ¶ 768, at 169 (3d ed. 2008).
7
In 2003, Freightliner and Eaton modified the
agreement from a fixed 92% goal to a sliding scale, which
entitled Freightliner to different rebates at different market-
penetration levels.
8
The share penetration targets in the Volvo LTA were
lower because Volvo also manufactured transmissions for use
in its own trucks. The commitment to Eaton, plus Volvo‘s
9
requirements contracts because they did not expressly require
the OEMs to purchase a specified percentage of their needs
from Eaton. However, the Freightliner and Volvo LTAs gave
Eaton the right to terminate the agreements if the share
penetration goals were not met. Additionally, if an OEM did
not meet its market-share penetration target for one year,
Eaton could require repayment of all contractual savings.
Each LTA also required the OEM to publish Eaton as
the standard offering in its data book, and under two of the
four LTAs, the OEM was required to remove competitors‘
products from its data book entirely. Freightliner agreed to
exclusively publish Eaton transmissions in its data books
through 2002, but reserved the right to publish ZF Meritor‘s
FreedomLine through the life of the agreement. In 2002,
Freightliner and Eaton revised the LTA to allow Freightliner
to publish other competitors‘ transmissions, but the revised
LTA provided that Eaton had the right to ―renegotiate the
rebate schedule‖ if Freightliner chose to publish a
competitor‘s transmission. Subsequently, Freightliner agreed
to a request by Eaton to remove FreedomLine from all of its
data books. Eaton‘s LTA with International also required that
International list exclusively Eaton transmissions in its
electronic data book. International did, however, publish ZF
Meritor‘s manual transmissions in its printed data book. The
Volvo and PACCAR LTAs did not require that Eaton
products be the exclusive offering, but did require that Eaton
products be listed as the preferred offering. Both Volvo and
own manufactured products, accounted for more than 85% of
Volvo‘s needs.
10
PACCAR continued to list ZF Meritor‘s products in their data
books. In the 1990s, Meritor‘s products were listed in all
OEM component data books, and in some cases, had
preferred positioning.
The LTAs also required the OEMs to ―preferential
price‖ Eaton transmissions against competitors‘ equivalent
transmissions. Eaton claims that it sought preferential pricing
to ensure that its low prices were passed on to truck buyers.
However, there were no express requirements in the LTAs
that savings be passed on to truck buyers (i.e., that Eaton‘s
prices be reduced) and there is evidence that the ―preferential
pricing‖ was achieved by both lowering the prices of Eaton‘s
products and raising the prices of competitors‘ products.
Eaton notes that it was ―common‖ for price savings to be
passed down to truck buyers, and a Volvo executive testified
that some of the savings from Eaton products were passed
down while others were kept to improve profit margins.
Plaintiffs, however, emphasize that according to an email sent
by Eaton to Freightliner, the Freightliner LTA required that
ZF Meritor‘s products be priced at a $200 premium over
equivalent Eaton products. Likewise, International agreed to
an ―artificial[] penal[ty]‖ of $150 on all of ZF Meritor‘s
transmissions as of early 2003, and PACCAR imposed a
penalty on customers who chose ZF Meritor‘s products.
Finally, each LTA contained a ―competitiveness‖
clause, which permitted the OEM to purchase transmissions
from another supplier if that supplier offered the OEM a
lower price or a better product, the OEM notified Eaton of the
competitor‘s offer, and Eaton could not match the price or
quality of the product after good faith efforts. The parties
11
dispute the significance of the ―competitiveness‖ clauses.
Eaton maintains that Plaintiffs were free to win the OEMs‘
business simply by offering a better product or a lower price,
while Plaintiffs argue and presented testimony from OEM
officials that, due to Eaton‘s status as a dominant supplier, the
competitiveness clauses were effectively meaningless.
3. Competition under the LTAs and
Plaintiffs’ Exit from the Market
After Eaton entered into its LTAs with the OEMs, ZF
Meritor shifted its marketing focus from the OEM level to a
strategy targeted at truck buyers. Also during this time
period, both ZF Meritor and Eaton experienced quality and
performance issues with their transmissions. For example,
Eaton‘s Lightning transmission, which was an initial attempt
by Eaton to compete with FreedomLine, was ―not perceived
as a good [product]‖ and was ultimately taken off the market.
ZF Meritor‘s FreedomLine and ―G Platform‖ transmissions
required frequent repairs, and in 2002 and 2003, ZF Meritor
faced millions of dollars in warranty claims.
During the life of the LTAs, the OEMs worked with
Eaton to develop a strategy to combat ZF Meritor‘s growth.
On Eaton‘s urging, the OEMs imposed additional price
penalties on customers that selected ZF Meritor products,
―force fed‖ Eaton products to customers, and sought to
persuade truck fleets using ZF Meritor transmissions to shift
to Eaton transmissions. At all times relevant to this case,
Eaton‘s average prices were lower than Plaintiffs‘ average
prices, and on several occasions, Plaintiffs declined to grant
price concessions requested by OEMs. Although Eaton‘s
12
prices were generally lower than Plaintiffs‘ prices, Eaton
never priced at a level below its costs.
By 2003, ZF Meritor determined that it was limited by
the LTAs to no more than 8% of the market, far less than the
30% that it had projected at the beginning of the joint venture.
ZF Meritor officials concluded that the company could not
remain viable with a market share below 10% and therefore
decided to dissolve the joint venture. After ZF Meritor‘s
departure, Meritor remained a supplier of HD transmissions
and became a sales agent for ZF AG to ensure continued
customer access to the FreedomLine. However, Meritor‘s
market share dropped to 4% by the end of fiscal year 2005,
and Meritor exited the business in January 2007.
B. Procedural History
On October 5, 2006, Plaintiffs filed suit against Eaton
in the U.S. District Court for the District of Delaware,
alleging that Eaton used unlawful agreements in restraint of
trade, in violation of Section 1 of the Sherman Act, 15 U.S.C.
§ 1; acted unlawfully to maintain a monopoly, in violation of
Section 2 of the Sherman Act, 15 U.S.C. § 2; and entered into
illegal restrictive dealing agreements, in violation of Section 3
of the Clayton Act, 15 U.S.C. § 14. Specifically, Plaintiffs
alleged that Eaton ―used its dominant position to induce all
heavy duty truck manufacturers to enter into de facto
exclusive dealing contracts with Eaton,‖ and that such
agreements foreclosed Plaintiffs from over 90% of the market
for HD transmission sales. Plaintiffs sought treble damages,
pursuant to Section 4 of the Clayton Act, 15 U.S.C. § 15, and
13
injunctive relief, pursuant to Section 16 of the Clayton Act,
15 U.S.C. § 26.
On February 17, 2009, Plaintiffs‘ expert, Dr. David
DeRamus (―DeRamus‖), submitted a report on both liability
and damages. On May 11, 2009, Eaton filed a motion,
pursuant to Daubert v. Merrell Dow Pharmaceuticals, Inc.,
509 U.S. 579 (1993), to exclude DeRamus‘s testimony. The
District Court ruled that DeRamus would be allowed to testify
regarding liability, but excluded DeRamus‘s testimony on the
issue of damages on the basis that his damages opinion failed
the reliability requirements of Daubert and the Federal Rules
of Evidence. ZF Meritor LLC v. Eaton Corp., 646 F. Supp.
2d 663 (D. Del. 2009). Plaintiffs filed a motion for
clarification, requesting that DeRamus be allowed to testify to
alternate damages calculations based on other data in his
expert report, or in the alternative, seeking permission for
DeRamus to amend his expert report to present his alternate
damages calculations. The District Court decided to defer
resolution of the damages issue and bifurcate the case.
The parties proceeded to trial on liability. On October
8, 2009, after a four-week trial, the jury returned a complete
verdict for Plaintiffs, finding that Eaton had violated Sections
1 and 2 of the Sherman Act, and Section 3 of the Clayton Act.
Following the verdict, Plaintiffs asked the District Court to
set a damages trial, but no damages trial was set at that time.
On October 30, 2009, Plaintiffs supplemented their earlier
motion for clarification, incorporating additional arguments
based on developments at trial.
14
On November 3, 2009, Eaton filed a renewed motion
for judgment as a matter of law, or in the alternative, for a
new trial. Eaton‘s principal argument was that Plaintiffs
failed to establish that Eaton engaged in anticompetitive
conduct because Plaintiffs did not show, nor did they attempt
to show, that Eaton priced its transmissions below its costs.
Sixteen months later, on March 10, 2011, the District Court
denied Eaton‘s motion, reasoning that Eaton‘s prices were not
dispositive, and that there was sufficient evidence for a jury to
conclude that Eaton‘s conduct unlawfully foreclosed
competition in a substantial portion of the HD transmissions
market. ZF Meritor LLC v. Eaton Corp., 769 F. Supp. 2d 684(D. Del. 2011).
On August 4, 2011, the District Court denied
Plaintiffs‘ motion for clarification, and denied Plaintiffs‘
request to allow DeRamus to amend his expert report to
include alternate damages calculations. The same day, the
District Court entered an order awarding Plaintiffs $0 in
damages. On August 19, 2011, the District Court entered an
injunction prohibiting Eaton from ―linking discounts and
other benefits to market penetration targets,‖ but stayed the
injunction pending appeal. Eaton filed a timely notice of
appeal and Plaintiffs filed a timely cross-appeal.
II. JURISDICTION AND STANDARD OF REVIEW
The District Court had jurisdiction over this case
pursuant to 28 U.S.C. §§ 1331 and 1337. We have appellate
jurisdiction under 28 U.S.C. § 1291.
15
We exercise plenary review over an order denying a
motion for judgment as a matter of law. LePage’s Inc. v. 3M,
324 F.3d 141, 145 (3d Cir. 2003) (en banc). A motion for
judgment as a matter of law should be granted ―only if,
viewing the evidence in the light most favorable to the
nonmovant and giving it the advantage of every fair and
reasonable inference, there is insufficient evidence from
which a jury reasonably could find liability.‖ Id. at 145-46(quoting Lightning Lube, Inc. v. Witco Corp., 4 F.3d 1153,
1166 (3d Cir. 1993)). We review questions of law underlying
a jury verdict under a plenary standard of review. Id. at 146
(citing Bloom v. Consol. Rail Corp., 41 F.3d 911, 913 (3d Cir.
1994)). Underlying legal questions aside, ―[a] jury verdict
will not be overturned unless the record is critically deficient
of that quantum of evidence from which a jury could have
rationally reached its verdict.‖ Swineford v. Snyder Cnty., 15
F.3d 1258, 1265 (3d Cir. 1994).
We review a district court‘s decision to exclude expert
testimony for abuse of discretion. Montgomery Cnty. v.
Microvote Corp., 320 F.3d 440, 445 (3d Cir. 2003). To the
extent the district court‘s decision involved an interpretation
of the Federal Rules of Evidence, our review is plenary.
Elcock v. Kmart Corp., 233 F.3d 734, 745 (3d Cir. 2000). We
also review a district court‘s decisions regarding discovery
and case management for abuse of discretion. United States
v. Schiff, 602 F.3d 152, 176 (3d Cir. 2010); In re Fine Paper
Antitrust Litig., 685 F.2d 810, 817-18 (3d Cir. 1982).
We review legal conclusions regarding standing de
novo, and the underlying factual determinations for clear
16
error. Interfaith Cmty. Org. v. Honeywell Int’l, Inc., 399 F.3d
248, 253 (3d Cir. 2005).
III. DISCUSSION
A. Effect of the Price-Cost Test
The most significant issue in this case is whether
Plaintiffs‘ allegations under Sections 1 and 2 of the Sherman
Act and Section 3 of the Clayton Act are subject to the price-
cost test or the ―rule of reason‖ applicable to exclusive
dealing claims. Under the rule of reason, an exclusive
dealing arrangement will be unlawful only if its ―probable
effect‖ is to substantially lessen competition in the relevant
market. Tampa Elec. Coal Co. v. Nashville Coal Co., 365
U.S. 320, 327-29 (1961); United States v. Dentsply Int’l, 399
F.3d 181, 191 (3d Cir. 2005); Barr Labs., Inc. v. Abbott
Labs., 978 F.2d 98, 110 (3d Cir. 1992). In contrast, under the
price-cost test, to succeed on a challenge to the defendant‘s
pricing practices, a plaintiff must prove ―that the
[defendant‘s] prices are below an appropriate measure of [the
defendant‘s] costs.‖ Brooke Grp. Ltd. v. Brown &
Williamson Tobacco Corp., 509 U.S. 209, 222 (1993).9
9
Although Plaintiffs brought claims under three
statutes (Sections 1 and 2 of the Sherman Act and Section 3
of the Clayton Act), our analysis regarding the applicability
of the price-cost test is the same for all of Plaintiffs‘ claims.
In order to establish an actionable antitrust violation, a
plaintiff must show both that the defendant engaged in
anticompetitive conduct and that the plaintiff suffered
17
antitrust injury as a result. Atl. Richfield Co. v. USA
Petroleum Co., 495 U.S. 328, 339-40 (1990). Because a lack
of anticompetitive conduct precludes a finding of antitrust
injury, the key question for us is whether Eaton engaged in
anticompetitive conduct. See id. at 339 (―Antitrust injury
does not arise . . . until a private party is adversely affected by
an anticompetitive aspect of the defendant‘s conduct.‖).
Sections 1 and 2 of the Sherman Act and Section 3 of
the Clayton Act each include an anticompetitive conduct
element, although each statute articulates that element in a
slightly different way. Under Section 1 of the Sherman Act, a
plaintiff must establish that the defendant was a party to a
contract, combination or conspiracy that ―imposed an
unreasonable restraint on trade.‖ 15 U.S.C. § 1; In re Ins.
Brokerage Antitrust Litig., 618 F.3d 300, 314-15 (3d Cir.
2010). Under Section 2, a plaintiff must demonstrate that the
defendant willfully acquired or maintained its monopoly
power in the relevant market. 15 U.S.C. § 2; United States v.
Grinnell Corp., 384 U.S. 564, 570-71 (1966). ―A monopolist
willfully acquires or maintains monopoly power when it
competes on some basis other than the merits.‖ LePage’s Inc.
v. 3M, 324 F.3d 141, 147 (3d Cir. 2003) (en banc) (citing
Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S.
585, 605 n.32 (1985)). Finally, Section 3 of the Clayton Act
makes it unlawful for a person to enter into an exclusive
dealing contract where the effect of such an agreement is to
substantially lessen competition or create a monopoly. 15
U.S.C. § 14.
18
Eaton urges us to apply the price-cost test, arguing that
Plaintiffs failed to establish that Eaton engaged in
anticompetitive conduct or that Plaintiffs suffered an antitrust
injury because Plaintiffs did not prove—or even attempt to
prove—that Eaton priced its transmissions below an
appropriate measure of its costs. We decline to adopt Eaton‘s
unduly narrow characterization of this case as a ―pricing
practices‖ case, i.e., a case in which price is the clearly
predominant mechanism of exclusion. Plaintiffs consistently
argued that the LTAs, in their entirety, constituted de facto
exclusive dealing contracts, which improperly foreclosed a
substantial share of the market, and thereby harmed
competition. Accordingly, as we will discuss below, we must
evaluate the legality of Eaton‘s conduct under the rule of
reason to determine whether the ―probable effect‖ of such
conduct was to substantially lessen competition in the HD
transmissions market in North America. Tampa Elec., 365
U.S. at 327-29. The price-cost test is not dispositive.
1. Law of Exclusive Dealing
Exclusive dealing claims may be brought under
Sections 1 and 2 of the Sherman Act and Section 3 of the
Clayton Act. LePage’s, 324 F.3d at 157. Additionally, the
Supreme Court has held that the price-cost test is not confined
to any one antitrust statute, and applies to pricing practices
claims under the Sherman Act, the Clayton Act, and the
Robinson-Patman Act. Brooke Grp. Ltd. v. Brown &
Williamson Tobacco Corp., 509 U.S. 209, 222-23 (1993); Atl.
Richfield, 495 U.S. at 339-40. Thus, regardless of which test
applies, that test is applicable to each of Plaintiffs‘ claims.
19
An exclusive dealing arrangement is an agreement in
which a buyer agrees to purchase certain goods or services
only from a particular seller for a certain period of time.
Herbert Hovenkamp, Antitrust Law ¶ 1800a, at 3 (3d ed.
2011). The primary antitrust concern with exclusive dealing
arrangements is that they may be used by a monopolist to
strengthen its position, which may ultimately harm
competition. Dentsply, 399 F.3d at 191. Generally, a
prerequisite to any exclusive dealing claim is an agreement to
deal exclusively. Tampa Elec., 365 U.S. at 326-27; see
Dentsply, 399 F.3d at 193-94; Barr Labs., 978 F.2d at 110 &
n.24.10 An express exclusivity requirement, however, is not
necessary, LePage’s, 324 F.3d at 157, because we look past
the terms of the contract to ascertain the relationship between
the parties and the effect of the agreement ―in the real world.‖
Dentsply, 399 F.3d at 191, 194. Thus, de facto exclusive
dealing claims are cognizable under the antitrust laws.
LePage’s, 324 F.3d at 157.
Exclusive dealing agreements are often entered into for
entirely procompetitive reasons, and generally pose little
threat to competition. Race Tires Am., Inc. v. Hoosier Racing
10
Evidence of an agreement is expressly required
under Section 1 of the Sherman Act and Section 3 of the
Clayton Act. See 15 U.S.C. §§ 1 and 14. However, an
agreement is not necessarily required under Section 2 of the
Sherman Act, which can provide a vehicle for challenging a
dominant firm‘s unilateral imposition of exclusive dealing on
customers. See 15 U.S.C. § 2; Herbert Hovenkamp, Antitrust
Law ¶ 1821a, at 183 (3d ed. 2011).
20
Tire Corp., 614 F.3d 57, 76 (3d Cir. 2010) (―[I]t is widely
recognized that in many circumstances, [exclusive dealing
arrangements] may be highly efficient—to assure supply,
price stability, outlets, investment, best efforts or the like—
and pose no competitive threat at all.‖) (quoting E. Food
Servs. v. Pontifical Catholic Univ. Servs. Ass’n, 357 F.3d 1, 8
(1st Cir. 2004)). For example, ―[i]n the case of the buyer,
they may assure supply, afford protection against rises in
price, enable long-term planning on the basis of known costs,
and obviate the expense and risk of storage in the quantity
necessary for a commodity having a fluctuating demand.‖
Standard Oil Co. v. United States, 337 U.S. 293, 306 (1949).
From the seller‘s perspective, an exclusive dealing
arrangement with customers may reduce expenses, provide
protection against price fluctuations, and offer the possibility
of a predictable market. Id. at 306-07; see also Ryko Mfg. Co.
v. Eden Servs., 823 F.2d 1215, 1234 n.17 (8th Cir. 1987)
(explaining that exclusive dealing contracts can help prevent
dealer free-riding on manufacturer-supplied investments to
promote rival‘s products). As such, competition to be an
exclusive supplier may constitute ―a vital form of rivalry,‖
which the antitrust laws should encourage. Race Tires, 614
F.3d at 83 (quoting Menasha Corp. v. News Am. Mktg. In-
Store, Inc., 354 F.3d 661, 663 (7th Cir. 2004)).
However, ―[e]xclusive dealing can have adverse
economic consequences by allowing one supplier of goods or
services unreasonably to deprive other suppliers of a market
for their goods[.]‖ Jefferson Parish Hosp. Dist. No. 2 v.
Hyde, 466 U.S. 2, 45 (1984) (O‘Connor, J., concurring),
abrogated on other grounds by Ill. Tool Works Inc. v. Indep.
21
Ink, Inc., 547 U.S. 28 (2006); Barry Wright, 724 F.2d at 236
(explaining that ―under certain circumstances[,] foreclosure
might discourage sellers from entering, or seeking to sell in, a
market at all, thereby reducing the amount of competition that
would otherwise be available‖). Exclusive dealing
arrangements are of special concern when imposed by a
monopolist. See Dentsply, 399 F.3d at 187 (―Behavior that
otherwise might comply with antitrust law may be
impermissibly exclusionary when practiced by a
monopolist.‖). For example:
[S]uppose an established manufacturer has long
held a dominant position but is starting to lose
market share to an aggressive young rival. A
set of strategically planned exclusive-dealing
contracts may slow the rival‘s expansion by
requiring it to develop alternative outlets for its
product, or rely at least temporarily on inferior
or more expensive outlets. Consumer injury
results from the delay that the dominant firm
imposes on the smaller rival‘s growth.
Phillip Areeda & Herbert Hovenkamp, Antitrust Law ¶ 1802c,
at 64 (2d ed. 2002). In some cases, a dominant firm may be
able to foreclose rival suppliers from a large enough portion
of the market to deprive such rivals of the opportunity to
achieve the minimum economies of scale necessary to
compete. Id.; see LePage’s, 324 F.3d at 159.
Due to the potentially procompetitive benefits of
exclusive dealing agreements, their legality is judged under
the rule of reason. Tampa Elec., 365 U.S. at 327. The
22
legality of an exclusive dealing arrangement depends on
whether it will foreclose competition in such a substantial
share of the relevant market so as to adversely affect
competition. Id. at 328; Barr Labs., 978 F.2d at 110. In
conducting this analysis, courts consider not only the
percentage of the market foreclosed, but also take into
account ―the restrictiveness and the economic usefulness of
the challenged practice in relation to the business factors
extant in the market.‖ Barr Labs., 978 F.2d at 110-11(quoting Am. Motor Inns, Inc. v. Holiday Inns, Inc., 521 F.2d
1230, 1251-52 n.75 (3d Cir. 1975)). As the Supreme Court
has explained:
[I]t is necessary to weigh the probable effect of
the contract on the relevant area of effective
competition, taking into account the relative
strength of the parties, the proportionate volume
of commerce involved in relation to the total
volume of commerce in the relevant market
area, and the probable immediate and future
effects which pre-emption of that share of the
market might have on effective competition
therein.
Tampa Elec., 365 U.S. at 329. In other words, an exclusive
dealing arrangement is unlawful only if the ―probable effect‖
of the arrangement is to substantially lessen competition,
rather than merely disadvantage rivals. Id.; Dentsply, 399
F.3d at 191 (―The test [for determining anticompetitive effect]
is not total foreclosure, but whether the challenged practices
bar a substantial number of rivals or severely restrict the
market‘s ambit.‖).
23
There is no set formula for evaluating the legality of an
exclusive dealing agreement, but modern antitrust law
generally requires a showing of significant market power by
the defendant, Tampa Elec., 365 U.S. at 329; Race Tires, 614
F.3d at 74-75; LePage’s, 324 F.3d at 158, substantial
foreclosure, Tampa Elec., 365 U.S. at 327-28; United States
v. Microsoft Corp., 253 F.3d 34, 69 (D.C. Cir. 2001),
contracts of sufficient duration to prevent meaningful
competition by rivals, CDC Techs., Inc. v. IDEXX Labs., Inc.,
186 F.3d 74, 81 (2d Cir. 1999); Omega Envtl., Inc. v.
Gilbarco, Inc., 127 F.3d 1157, 1163 (9th Cir. 1997), and an
analysis of likely or actual anticompetitive effects considered
in light of any procompetitive effects, Race Tires, 614 F.3d at
75; Dentsply, 399 F.3d at 194; Barr Labs., 978 F.2d at 111.
Courts will also consider whether there is evidence that the
dominant firm engaged in coercive behavior, Race Tires, 614
F.3d at 77; SmithKline Corp. v. Eli Lilly & Co., 575 F.2d
1056, 1062 (3d Cir. 1978), and the ability of customers to
terminate the agreements, Dentsply, 399 F.3d at 193-94. The
use of exclusive dealing by competitors of the defendant is
also sometimes considered. Standard Oil, 337 U.S. at 309,
314; NicSand, Inc. v. 3M Co., 507 F.3d 442, 454 (6th Cir.
2007).
2. Brooke Group and the Price-Cost test
We turn now to some fundamental principles regarding
predatory pricing claims and the price-cost test. ―Predatory
pricing may be defined as pricing below an appropriate
measure of cost for the purpose of eliminating competitors in
the short run and reducing competition in the long run.‖
Cargill, Inc. v. Monfort of Colo., 479 U.S. 104, 117 (1986);
24
see Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475
U.S. 574, 584 n.8 (1986); Advo, Inc. v. Phila. Newspapers,
Inc., 51 F.3d 1191, 1198 (3d Cir. 1995). The Supreme Court
has expressed deep skepticism of predatory pricing claims.
See Cargill, 479 U.S. at 121 n.17 (―Although the
commentators disagree as to whether it is ever rational for a
firm to engage in such conduct, it is plain that the obstacles to
the successful execution of a strategy of predation are
manifold, and that the disincentives to engage in such a
strategy are accordingly numerous.‖) (citations omitted);
Matsushita, 475 U.S. at 589 (―[P]redatory pricing schemes
are rarely tried, and even more rarely successful.‖) (citations
omitted). In the typical predatory pricing scheme, a firm
reduces the sale price of its product to below-cost, intending
to drive competitors out of the business. Weyerhaeuser Co. v.
Ross-Simmons Hardwood Lumber Co., 549 U.S. 312, 318
(2007). Then, once competitors have been eliminated, the
firm raises its prices to supracompetitive levels. Id. For such
a scheme to make economic sense, the firm must recoup the
losses suffered during the below-cost phase in the
supracompetitive phase. Id.; see Matsushita, 475 U.S. at 589(explaining that success under such a scheme is ―inherently
uncertain‖ because the firm must sustain definite short-term
losses, but the long-run gain depends on successfully
eliminating competition).
In Brooke Group Ltd. v. Brown & Williamson Tobacco
Corp., 509 U.S. at 222-24, the Supreme Court fashioned a
two-part test that reflected this ―economic reality.‖
Weyerhaeuser, 549 U.S. at 318. The Court held that, to
succeed on a predatory pricing claim, the plaintiff must
25
prove: (1) ―that the prices complained of are below an
appropriate measure of [the defendant‘s] costs‖; and (2) that
the defendant had ―a dangerous probability . . . of recouping
its investment in below-cost prices.‖ Brooke Grp., 509 U.S.
at 222-24 (citations omitted). We are concerned only with the
first requirement, which has become known as the price-cost
test. In adopting the price-cost test, the Court rejected the
notion that above-cost prices that are below general market
levels or below the costs of a firm‘s competitors are
actionable under the antitrust laws. Id. at 223. ―Low prices
benefit consumers regardless of how those prices are set, and
so long as they are above predatory levels [i.e., above-cost],
they do not threaten competition.‖ Id. (quoting Atl. Richfield
Co. v. USA Petroleum Co., 495 U.S. 328, 340 (1990)). Low,
but above-cost, prices are generally procompetitive because
―the exclusionary effect of prices above a relevant measure of
cost [generally] reflects the lower cost structure of the alleged
predator, and so represents competition on the merits[.]‖ Id.;
see Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S.
477, 488 (1977) (―The antitrust laws . . . were enacted for ‗the
protection of competition, not competitors.‘‖) (quoting Brown
Shoe Co. v. United States, 370 U.S. 294, 320 (1962)). The
Court acknowledged that there may be situations in which
above-cost prices are anticompetitive, but stated that it ―is
beyond the practical ability of a judicial tribunal‖ to ascertain
whether above-cost pricing is anticompetitive ―without
courting intolerable risks of chilling legitimate price-cutting.‖
Brooke Grp., 509 U.S. at 223 (citing Phillip Areeda &
Herbert Hovenkamp, Antitrust Law ¶¶ 714.2, 714.3 (Supp.
2002)). ―To hold that the antitrust laws protect competitors
from the loss of profits due to [above-cost] price competition
26
would, in effect, render illegal any decision by a firm to cut
prices in order to increase market share. The antitrust laws
require no such perverse result.‖ Id. (quoting Cargill, 479
U.S. at 116). Significantly, because ―[c]utting prices in order
to increase business often is the very essence of competition .
. . , [i]n cases seeking to impose antitrust liability for prices
that are too low, mistaken inferences are ‗especially costly,
because they chill the very conduct that antitrust laws are
designed to protect.‘‖ Pac. Bell Tel. Co. v. linkLine
Commc’ns, Inc., 555 U.S. 438, 451 (2009) (quoting
Matsushita, 475 U.S. at 594) (additional citations omitted).
3. Effect of the Price-Cost Test on
Plaintiffs’ Exclusive Dealing Claims
Eaton argues that principles from the predatory pricing
case law apply in this case because Plaintiffs‘ claims are, at
their core, no more than objections to Eaton offering prices,
through its rebate program, which Plaintiffs were unable to
match. Eaton contends that Plaintiffs have identified nothing,
other than Eaton‘s pricing practices, that incentivized the
OEMs to enter into the LTAs, and because price was the
incentive, we must apply the price-cost test. We
acknowledge that even if a plaintiff frames its claim as one of
exclusive dealing, the price-cost test may be dispositive.
Implicit in the Supreme Court‘s creation of the price-cost test
was a balancing of the procompetitive justifications of above-
cost pricing against its anticompetitive effects (as well as the
anticompetitive effects of allowing judicial inquiry into
above-cost pricing), and a conclusion that the balance always
tips in favor of allowing above-cost pricing practices to stand.
See linkLine, 555 U.S. at 451; Brooke Grp., 509 U.S. at 223.
27
Thus, in the context of exclusive dealing, the price-cost test
may be utilized as a specific application of the ―rule of
reason‖ when the plaintiff alleges that price is the vehicle of
exclusion. See, e.g., Concord Boat Corp. v. Brunswick Corp.,
207 F.3d 1039, 1060-63 (8th Cir. 2000).
Here, Eaton argues that the price-cost test is
dispositive, and therefore that Plaintiffs‘ claims must fail
because Plaintiffs failed to show that the market-share rebates
offered by Eaton pursuant to the LTAs resulted in below-cost
prices. We do not disagree that predatory pricing principles,
including the price-cost test, would control if this case
presented solely a challenge to Eaton‘s pricing practices.11
11
Despite the arguments of amicus curiae, the
American Antitrust Institute, our decision in LePage’s v. 3M
does not indicate otherwise. In LePage’s, we declined to
apply the price-cost test to a challenge to a bundled rebate
scheme, reasoning that such a scheme was better analogized
to unlawful tying than to predatory pricing. See 324 F.3d at
155. In that case, the plaintiff (LePage‘s) was the market
leader in sales of ―private label‖ (store brand) transparent
tape. Id. at 144. As LePage‘s market share fell, it brought
suit against 3M, alleging that 3M, which manufactured
Scotch tape, some private label tape, and a number of other
products, leveraged its monopoly power over Scotch brand
tape and other products to monopolize the private label tape
market. Id. at 145. Specifically, LePage‘s challenged 3M‘s
multi-tiered bundled rebate program, which offered
progressively higher rebates when customers increased
purchases across 3M‘s different product lines. Id. The rebate
28
programs also set customer-specific target growth rates. Id. at
154. The sizes of the rebates were linked to the number of
product lines in which the targets were met; if a customer
failed to meet the target for any one product, it would lose the
rebates across all product lines. Id. LePage‘s could not offer
these discounts because it did not sell the same diverse array
of products as 3M. Id. at 155.
Relying on Brooke Group Ltd. v. Brown & Williamson
Tobacco Corp., 509 U.S. 209 (1993), 3M argued that its
bundled rebate program was lawful because the rebates never
resulted in below-cost pricing. We disagreed, reasoning that
the principal anticompetitive effect of 3M‘s bundled rebates
was analogous to an unlawful tying arrangement: when
offered by a monopolist, the rebates ―may foreclose portions
of the market to a potential competitor who does not
manufacture an equally diverse group of products and who
therefore cannot make a comparable offer.‖ LePage’s, 324 at
155.
For several reasons, we interpret LePage’s narrowly.
Most important, in light of the analogy drawn in LePage’s
between bundled rebates and unlawful tying, which ―cannot
exist unless two separate product markets have been linked,‖
Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 21
(1984), abrogated on other grounds by Ill. Tool Works Inc. v.
Indep. Ink, Inc., 547 U.S. 28 (2006), LePage’s is inapplicable
where, as here, only one product is at issue and the plaintiffs
have not made any allegations of bundling or tying. The
reasoning of LePage’s is limited to cases in which a single-
product producer is excluded through a bundled rebate
29
program offered by a producer of multiple products, which
conditions the rebates on purchases across multiple different
product lines. Accordingly, we join our sister circuits in
holding that the price-cost test applies to market-share or
volume rebates offered by suppliers within a single-product
market. See NicSand, Inc. v. 3M Co., 507 F.3d 442, 452 (6th
Cir. 2007); Concord Boat Corp. v. Brunswick Corp., 207 F.3d
1039, 1061 (8th Cir. 2000); Barry Wright Corp. v. ITT
Grinnell Corp., 724 F.2d 227, 236 (1st Cir. 1983).
Additionally, several of the bases on which we
distinguished Brooke Group have been undermined by
intervening Supreme Court precedent, which counsels caution
in extending LePage’s. For example, we indicated in
LePage’s, 324 F.3d at 151, that Brooke Group might be
confined to the Robinson-Patman Act, but the Supreme Court
has made clear that the standard adopted in Brooke Group
also applies to predatory pricing claims under the Sherman
Act. Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber
Co., 549 U.S. 312, 318 n.1 (2007). Additionally, LePage’s,
324 F.3d at 151-52, suggested that Brooke Group is not
applicable in cases involving monopolists, but the Supreme
Court has since applied Brooke Group‘s price-cost test to
claims against a monopolist, Pac. Bell Tel. Co. v. linkLine
Commc’ns, Inc., 555 U.S. 438, 447-48 (2009), and a
monopsonist, Weyerhaeuser, 549 U.S. at 320-25. Finally, we
observed in LePage’s that, in the years following Brooke
Group, the Supreme Court had only cited the case four times
(and for unrelated propositions), but since LePage’s, the
Court has reaffirmed and extended Brooke Group. See
30
The lesson of the predatory pricing case law is that, generally,
above-cost prices are not anticompetitive, and although there
may be rare cases where above-cost prices are
anticompetitive in the long run, it is ―beyond the practical
ability‖ of courts to identify those rare cases without creating
an impermissibly high risk of deterring legitimate
procompetitive behavior (i.e., price-cutting). linkLine, 555
U.S. at 452; Weyerhaeuser, 549 U.S. at 318-19; Brooke Grp.,
509 U.S. at 223. These principles extend to above-cost
discounting or rebate programs, which condition the
discounts or rebates on the customer‘s purchasing of a
specified volume or a specified percentage of its requirements
from the seller. See NicSand, 507 F.3d at 451-52 (applying
price-cost test to a challenge to up-front payments offered by
a supplier to several large retailers on the basis that such
payments were ―nothing more than ‗price reductions offered
to the buyers for the exclusive right to supply a set of stores
under multi-year contracts‘‖); Concord Boat, 207 F.3d at
1060-63 (applying price-cost test to volume discounts and
market-share discounts offered by a manufacturer); Barry
Wright, 724 F.2d at 232 (applying the price-cost test to
uphold discounts linked to a requirements contract); see also
linkLine, 555 U.S. at 447-48; Weyerhaeuser, 549 U.S. at 325.
In doing so, the Court emphasized the importance of Brooke
Group in light of ―developments in economic theory and
antitrust jurisprudence,‖ and downplayed the significance of
seemingly inconsistent circuit court antitrust precedent from
the 1950s and 1960s, some of which we referenced in
LePage’s. See linkLine, 555 U.S. at 452 n.3.
31
Race Tires, 614 F.3d at 79 (―[I]t is no more an act of
coercion, collusion, or [other anticompetitive conduct] for [a
supplier] . . . to offer more money to [a customer] than it is
for such [a] supplier[] to offer the lowest . . . prices.‖).
Moreover, a plaintiff‘s characterization of its claim as
an exclusive dealing claim does not take the price-cost test off
the table. Indeed, contracts in which discounts are linked to
purchase (volume or market share) targets are frequently
challenged as de facto exclusive dealing arrangements on the
grounds that the discounts induce customers to deal
exclusively with the firm offering the rebates. Hovenkamp ¶
1807a, at 132. However, when price is the clearly
predominant mechanism of exclusion, the price-cost test tells
us that, so long as the price is above-cost, the procompetitive
justifications for, and the benefits of, lowering prices far
outweigh any potential anticompetitive effects. See Brooke
Grp., 509 U.S. at 223; Concord Boat, 207 F.3d at 1062(noting that there is always a legitimate business justification
for lowering prices: attempting to attract additional business).
In each of the cases relied upon by Eaton, the Supreme
Court applied the price-cost test, regardless of the way in
which the plaintiff cast its grievance, because pricing itself
operated as the exclusionary tool. For example, in Cargill,
Inc. v. Monfort of Colorado, Inc., the plaintiff argued that a
proposed merger between vertically integrated firms violated
Section 7 of the Clayton Act because the result of the merger
would have been to substantially lessen competition or create
a monopoly. 479 U.S. at 114. The plaintiff offered, as a
theory of antitrust injury, that it faced a threat of lost profits
stemming from the possibility that the defendant, after the
32
merger, would lower its prices to a level at or above-cost. Id.
at 114-15. The plaintiff claimed that it would have to respond
by lowering its prices, which would cause it to suffer a loss in
profitability. Id. at 115. The Supreme Court held that such a
theory did not present a cognizable antitrust injury, reasoning
that ―the antitrust laws do not require the courts to protect
small businesses from the loss of profits due to continued
[above-cost] competition.‖ Id. at 116.
Atlantic Richfield Co. v. USA Petroleum Co. involved
an allegation that a vertical price-fixing agreement was
unlawful under Section 1 of the Sherman Act. 495 U.S. at
331. In that case, the plaintiff was an independent retail
marketer of gasoline, which bought gasoline from major
petroleum companies for resale under its own name. Id. The
defendant was an integrated oil company, which sold directly
to consumers through its own stations, and sold indirectly
through brand dealers. Id. Facing competition from
independent marketers like the plaintiff, the defendant
adopted a new marketing strategy, under which it encouraged
its dealers to match the retail prices offered by independents
by offering discounts and reducing the dealers‘ costs. Id. at
331-32. The plaintiff brought suit under the Sherman Act,
alleging that the defendant conspired with its dealers to sell
gasoline at below-market levels. Id. at 332. The district court
granted summary judgment for the defendant on the basis that
the plaintiff had not shown that the defendant engaged in
predatory pricing, and thus had not shown any antitrust
injury. Id. at 333. The U.S. Court of Appeals for the Ninth
Circuit reversed, USA Petroleum Co. v. Atl. Richfield Co.,
859 F.2d 687, 693 (9th Cir. 1988), reasoning that a showing
33
of predatory pricing was not necessary to establish antitrust
injury; rather, the antitrust laws were designed to ensure that
market forces alone determine what goods and services are
offered, and at what price they are sold, and thus, an antitrust
injury could result from a disruption in the market. The
Supreme Court disagreed, explaining that where a firm (or a
group of firms) lowers prices pursuant to a vertical
agreement, but maintains those prices above predatory levels,
any business lost by rivals cannot be viewed as an
anticompetitive consequence of the agreement. Atl. Richfield,
495 U.S. at 337. ―A firm complaining about the harm it
suffers from nonpredatory price competition is really
claiming that it is unable to raise prices.‖ Id. at 337-38.
In Brooke Group, the plaintiff and the defendant were
competitors in the cigarette market in the early 1980s. 509
U.S. at 212. At that time, demand for cigarettes in the United
States was declining and the plaintiff, once a major force in
the industry, had seen its market share drop to 2%. Id. at 214.
In response, the plaintiff developed a line of generic
cigarettes, which were significantly cheaper than branded
cigarettes. Id. The plaintiff promoted the generic cigarettes
at the wholesale level by offering rebates that increased with
the volume of cigarettes ordered. Id. Losing volume and
profits on its branded products, the defendant entered the
generic cigarette market. Id. at 215. At the retail level, the
suggested price of the defendant‘s generic cigarettes was the
same as that of the plaintiff‘s cigarettes, but the defendant‘s
volume discounts to wholesalers were larger. Id. The
plaintiff responded by increasing its wholesale rebates, and a
price war ensued. Id. at 216. Subsequently, the plaintiff filed
34
a complaint against the defendant under the Robinson-Patman
Act, 15 U.S.C. § 13(a), alleging that the defendant‘s volume
rebates amounted to unlawful price discrimination. Id. The
plaintiff explained that it would have been unable to reduce
its wholesale rebates without losing substantial market share.
Id. Accordingly, because the ―essence‖ of the plaintiff‘s
claim was that its ―rival ha[d] priced its products in an unfair
manner with an object to eliminate or retard competition and
thereby gain and exercise control over prices in the relevant
market,‖ the plaintiff had an obligation to show that the
defendant‘s prices were below its costs. Id. at 222.
Here, in contrast to Cargill, Atlantic Richfield, and
Brooke Group, Plaintiffs did not rely solely on the
exclusionary effect of Eaton‘s prices, and instead highlighted
a number of anticompetitive provisions in the LTAs.
Plaintiffs alleged that Eaton used its position as a supplier of
necessary products to persuade OEMs to enter into
agreements imposing de facto purchase requirements of
roughly 90% for at least five years, and that Eaton worked in
concert with the OEMs to block customer access to Plaintiffs‘
products, thereby ensuring that Plaintiffs would be unable to
build enough market share to pose any threat to Eaton‘s
monopoly. Therefore, because price itself was not the clearly
predominant mechanism of exclusion, the price-cost test
cases are inapposite, and the rule of reason is the proper
framework within which to evaluate Plaintiffs‘ claims.
We recognize that Eaton‘s rebates were part of
Plaintiffs‘ case. DeRamus testified about the exclusionary
effect of the rebates, OEM officials testified that Eaton
offered lower prices, and Plaintiffs‘ counsel stated in oral
35
argument that part of the reason ZF Meritor could not
increase sales above a certain level was that ―the OEMs were
trying to hit those [share-penetration] targets to get their
money from Eaton.‖ Eaton‘s post-rebate prices were
attractive to the OEMs, and Eaton‘s low prices may, in fact,
have been an inducement for the OEMs to enter into the
LTAs. That fact is not irrelevant, as it may help explain why
the OEMs agreed to otherwise unfavorable terms and it may
help to rebut an argument that the agreements were
inefficient. Hovenkamp ¶ 1807b, at 134. However, contrary
to Eaton‘s assertions, that fact is not dispositive.
Plaintiffs presented considerable evidence that Eaton
was a monopolist in the industry and that it wielded its
monopoly power to effectively force every direct purchaser of
HD transmissions to enter into restrictive long-term
agreements, despite the inclusion in such agreements of terms
unfavorable to the OEMs and their customers. Significantly,
there was considerable testimony that the OEMs did not want
to remove ZF Meritor‘s transmissions from their data books,
but that they were essentially forced to do so or risk financial
penalties or supply shortages. Several OEM officials testified
that exclusive data book listing was not a common practice in
the industry and, in fact, it was probably detrimental to
customers. An email between Freightliner employees stated:
―From a customer perspective, publishing [ZF Meritor‘s]
product is probably the right thing to do and [it] should never
have been taken out of the book. It is a good product with
considerable demand in the marketplace.‖ The email went on
to conclude, however, that including ZF Meritor‘s products
would not be ―prudent‖ because it would jeopardize
36
Freightliner‘s relationship with Eaton. Eaton itself even
acknowledged that the OEMs were dissatisfied. Internal
Eaton correspondence reveals that PACCAR complained that
the LTAs were preventing it from promoting a competitive
product (FreedomLine), which was being demanded by truck
buyers. In fact, PACCAR felt that Eaton was holding it
―hostage.‖
Plaintiffs also introduced evidence that not only were
the rebates conditioned on the OEMs meeting the market
penetration targets, but so too was Eaton‘s continued
compliance with the agreements. As one OEM executive
testified, if the market penetration targets were not met, the
OEMs ―would have a big risk of cancellation of the contract,
price increases, and shortages if the market [was] difficult.‖
Eaton was a monopolist in the HD transmissions market, and
even if an OEM decided to forgo the rebates and purchase a
significant portion of its requirements from another supplier,
there would still have been a significant demand from truck
buyers for Eaton products. Therefore, losing Eaton as a
supplier was not an option.
Accordingly, this is not a case in which the
defendant‘s low price was the clear driving force behind the
customer‘s compliance with purchase targets, and the
customers were free to walk away if a competitor offered a
better price. Compare Concord Boat, 207 F.3d at 1063 (in
deciding to apply price-cost test, noting that customers were
free to walk away at any time and did so when the
defendant‘s competitors offered better discounts), with
Dentsply, 399 F.3d at 189-96 (applying exclusive dealing
analysis where the defendant threatened to refuse to continue
37
dealing with customers if customers purchased rival‘s
products, and no customer could stay in business without the
defendant‘s products). Rather, Plaintiffs introduced evidence
that compliance with the market penetration targets was
mandatory because failing to meet such targets would
jeopardize the OEMs‘ relationships with the dominant
manufacturer of transmissions in the market. See Dentsply,
399 F.3d at 194 (noting that ―[t]he paltry penetration in the
market by competitors over the years has been a refutation
of‖ the theory that a competitor could steal the defendant‘s
customers by offering a better deal or a lower price ―by
tangible and measurable results in the real world‖); id. at 195(explaining that an exclusivity policy imposed by a dominant
firm is especially troubling where it presents customers with
an ―all-or-nothing‖ choice).
Although the Supreme Court has created a safe harbor
for above-cost discounting, it has not established a per se rule
of non-liability under the antitrust laws for all contractual
practices that involve above-cost pricing. See Cascade
Health Solutions v. PeaceHealth, 515 F.3d 883, 901 (9th Cir.
2007) (stating that the Supreme Court‘s predatory pricing
decisions have not ―go[ne] so far as to hold that in every case
in which a plaintiff challenges low prices as exclusionary
conduct[,] the plaintiff must prove that those prices were
below cost‖). Nothing in the case law suggests, nor would it
be sound policy to hold, that above-cost prices render an
otherwise unlawful exclusive dealing agreement lawful. We
decline to impose such an unduly simplistic and mechanical
rule because to do so would place a significant portion of
38
anticompetitive conduct outside the reach of the antitrust laws
without adequate justification.
―[T]he means of illicit exclusion, like the means of
legitimate competition, are myriad.‖ Microsoft, 253 F.3d at
58; LePage’s, 324 F.3d at 152 (―‗Anticompetitive conduct‘
can come in too many different forms, and is too dependent
on context, for any court or commentator ever to have
enumerated all the varieties.‖) (quoting Caribbean Broad
Sys., Ltd. v. Cable & Wireless PLC, 148 F.3d 1080, 1087
(D.C. Cir. 1998)). The law has long recognized forms of
exclusionary conduct that do not involve below-cost pricing,
including unlawful tying, Jefferson Parish, 446 U.S. at 21;
Standard Oil, 337 U.S. at 305-06, enforcement of a legal
monopoly provided by a patent procured through fraud,
LePage’s, 324 F.3d at 152 (citing Walker Process Equip., Inc.
v. Food Mach. & Chem. Corp., 382 U.S. 172, 174 (1965)),
refusal to deal, Aspen Skiing Co. v. Aspen Highlands Skiing
Corp., 472 U.S. 585, 601-02 (1985); Otter Tail Power Co. v.
United States, 410 U.S. 366 (1973), exclusive dealing, Tampa
Electric, 365 U.S. at 327; Dentsply, 399 F.3d at 184, and
other unfair tortious conduct targeting competitors, Conwood
Co., L.P. v. U.S. Tobacco Co., 290 F.3d 768 (6th Cir. 2002);
Int’l Travel Arrangers, Inc. v. Western Airlines, Inc., 623
F.2d 1255 (8th Cir. 1980).
Despite Eaton‘s arguments to the contrary, we find
nothing in the Supreme Court‘s recent predatory pricing
decisions to indicate that the Court intended to overturn
decades of other precedent holding that conduct that does not
result in below-cost pricing may nevertheless be
anticompetitive. Rather, as we explained above, Brooke
39
Group and the cases preceding it each involved an allegation
that the defendant‘s pricing itself operated as the exclusionary
tool. See Brooke Grp., 509 U.S. at 212-22; Atl. Richfield, 495
U.S. at 331-38; Cargill, 409 U.S. at 114-16. Eaton places
particular emphasis on two recent cases, arguing that such
cases demonstrate the Supreme Court‘s willingness to extend
the price-cost test beyond the traditional predatory pricing
context. However, neither of these cases suggests that the
price-cost test applies to the exclusive dealing claims at issue
in our case.
In Weyerhaeuser Co. v. Ross-Simmons Hardwood
Lumber Co., 549 U.S. at 315, 320, the Supreme Court applied
the price-cost test to a case involving an allegation of
predatory bidding by a monopsonist.12 In a predatory bidding
scheme, a purchaser of inputs bids up the market price of a
critical input to such high levels that rival buyers cannot
survive, and as a result acquires or maintains monopsony
power. Id. Then, ―if all goes as planned,‖ once rivals have
been driven out, the predatory bidder will reap monopsonistic
profits to offset the losses that it suffered during the high-
bidding stage. Id. at 321. Therefore, the Court explained,
predatory pricing and predatory bidding claims are
―analytically similar.‖ Id. ―Both claims involve the
12
Monopsony power is market power on the buy (or
input) side of the market. Weyerhaeuser, 549 U.S. at 320.
―As such, a monopsony is to the buy side of the market what
a monopoly is to the sell side[.]‖ Id. (citing Roger Blair &
Jeffrey Harrison, Antitrust Policy and Monopsony, 76 Cornell
L. Rev. 297, 301, 320 (1991)).
40
deliberate use of unilateral pricing measures for
anticompetitive purposes.‖ Id. at 322. Moreover, the Court
noted, bidding up input prices, like lowering costs, is often
―the very essence of competition.‖ Id. at 323 (citing Brooke
Grp., 509 U.S. at 226). ―Just as sellers use output prices to
compete for purchasers, buyers use bid prices to compete for
scarce inputs. There are myriad legitimate reasons—ranging
from benign to affirmatively procompetitive—why a buyer
might bid up input prices.‖ Id. Furthermore, high bidding
will often benefit consumers because it will likely lead to the
firm‘s acquisition of more inputs, which will generally lead to
the manufacture of more outputs, and an increase in outputs
generally results in lower prices for consumers. Id. at 324.
Accordingly, the Supreme Court adopted a variation of the
price-cost test for allegations of predatory bidding: ―[a]
plaintiff must prove that the alleged predatory bidding led to
below-cost pricing of the predator‘s outputs.‖ Id. at 325. In
other words, the firm‘s predatory bidding must have caused
the cost of the relevant output to increase above the revenues
generated by the sale of such output. Id.
In Pacific Bell Telephone Co. v. linkLine
Communications, Inc., the Supreme Court relied, in part, on
the price-cost test to hold that the plaintiffs‘ price-squeezing
claim was not cognizable under the Sherman Act. 555 U.S. at
457. In that case, the plaintiffs alleged that the defendant, an
integrated firm that sold inputs at wholesale and sold finished
goods at retail, drove its competitors out of the market by
raising the wholesale price while simultaneously lowering the
retail price. Id. at 442. The Court held that, pursuant to
Verizon Communications Inc. v. Trinko, LLP, 540 U.S. at
41
409-10, the wholesale claim was not cognizable because the
defendant had no antitrust duty to deal with its competitors at
the wholesale level, and pursuant to Brooke Group, the retail
claim was not cognizable because the defendant‘s retail prices
were above cost. linkLine, 555 U.S. at 457. As to the retail
claim, the Court explained that ―recognizing a price-squeeze
claim where the defendant‘s retail price remains above cost
would invite the precise harm‖ the price-cost test was
designed to avoid: a firm might refrain from aggressive price
competition to avoid potential antitrust liability. Id. at 451-
52. Recognizing that the plaintiffs were trying to combine
two non-cognizable claims into a new form of antitrust
liability, the Court explained that ―[t]wo wrong claims do not
make one that is right.‖ Id. at 457.
Contrary to Eaton‘s argument, neither Weyerhaeuser
nor linkLine stands for the proposition that the price-cost test
applies here. Weyerhaeuser established the straightforward
principle that the exercise of market power on prices for the
purpose of driving out competitors should be judged by the
same standard, whether such power is exercised on the input
or output side of the market. See 549 U.S. at 321, 325. And
linkLine did no more than hold that two antitrust theories
cannot be combined to form a new theory of antitrust liability.
See 555 U.S. at 457. The plaintiffs‘ retail-level claim in
linkLine was a traditional pricing practices claim, and
therefore indistinguishable from the pricing practices claims
42
in Brooke Group, Atlantic Richfield, and Cargill. 555 U.S. at
451-52, 457.13
13
Eaton also relies heavily on the Supreme Court‘s
statement in Atlantic Richfield v. USA Petroleum Co. that
price-cost principles apply ―regardless of the type of antitrust
claim involved.‖ 495 U.S. at 340. When read in context,
however, it is clear that this statement means that the price-
cost test applies regardless of the statute under which a
pricing practices claim is brought, not that the price-cost
applies regardless of the type of anticompetitive conduct.
In Atlantic Richfield, the plaintiffs argued that no
showing of below-cost pricing was required to establish
antitrust injury for a claim of illegal price-fixing under
Section 1 of the Sherman Act because the price agreement
itself was illegal, and any losses that stem from such an
agreement, by definition, flow from that which makes the
defendant‘s conduct unlawful. Id. at 338. The Supreme
Court rejected that argument, reasoning that although price-
fixing is unlawful under Section 1, a plaintiff does not suffer
antitrust injury unless it is adversely affected by an
anticompetitive aspect of the defendant‘s conduct, and ―in the
context of pricing practices, only predatory pricing has the
requisite anticompetitive effect.‖ Id. at 339 (citing Brunswick
Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 487 (1977))
(additional citations omitted). It was in this in context, in
rejecting an argument that Section 1 was somehow exempt
from the price-cost test, that the Supreme Court made the
broad statement that it has ―adhered to . . . [price-cost]
43
In contrast to the price-cost test line of cases, here,
Plaintiffs do not allege that price itself functioned as the
exclusionary tool. As such, we conclude that the price-cost
test is not adequate to judge the legality of Eaton‘s conduct.
Although prices are unlikely to exclude equally efficient
rivals unless they are below-cost, exclusive dealing
arrangements can exclude equally efficient (or potentially
equally efficient) rivals, and thereby harm competition,
irrespective of below-cost pricing. See Dentsply, 399 F.3d at
191. Where, as here, a dominant supplier enters into de facto
exclusive dealing arrangements with every customer in the
principle[s] regardless of the type of antitrust claim
involved.‖ See id. at 340.
The Court‘s discussion following this statement
supports our interpretation. The Court went on to explain
that, for purposes of determining whether a plaintiff has
suffered antitrust injury in a pricing practices case, Section 1
is no different than, for example, the plaintiff‘s allegation in
Cargill, Inc. v. Monfort of Colorado, Inc. that the defendants‘
unlawful merger under Section 7 of the Clayton Act caused
antitrust injury. Id. at 340 (citing Cargill, 479 U.S. at 116)
(―To be sure, the source of the price competition in the instant
case was an agreement allegedly unlawful under § 1 of the
Sherman Act rather than a merger in violation of § 7 of the
Clayton Act. But that difference is not salient.‖). Moreover,
Atlantic Richfield was decided before LePage’s and we did
not interpret the ―regardless of the type of antitrust claim
involved‖ language as mandating the application of the price-
cost test to 3M‘s bundled rebates.
44
market, other firms may be driven out not because they
cannot compete on a price basis, but because they are never
given an opportunity to compete, despite their ability to offer
products with significant customer demand. See id. at 191,
194. Therefore, Eaton‘s attempt to characterize this case as a
pricing practices case, subject to the price-cost test, is
unavailing. We hold that, instead, the rule of reason from
Tampa Electric and its progeny must be applied to evaluate
Plaintiffs‘ claims.
B. Proof of Anticompetitive
Conduct and Antitrust Injury
We turn now to Eaton‘s contention that even leaving
aside the price-cost test, Plaintiffs failed to prove that Eaton‘s
LTAs were anticompetitive or that they caused antitrust
injury to Plaintiffs. The rule of reason governs Plaintiffs‘
claims under Section 1 and Section 2 of the Sherman Act, and
Section 3 of the Clayton Act. See LePage’s, 324 F.3d at 157
& n.10 (explaining that exclusive dealing claims are
cognizable under Sections 1 and 2 of the Sherman Act and
Section 3 of the Clayton Act, and evaluated under the same
rule of reason); see also Section III.A, supra, at n.9. Under
the rule of reason, an exclusive dealing arrangement is
anticompetitive only if its ―probable effect‖ is to substantially
lessen competition in the relevant market, rather than merely
disadvantage rivals. Tampa Elec., 365 U.S. at 328-29.
In addition to establishing a statutory violation, a
plaintiff must demonstrate that it suffered antitrust injury.
Race Tires, 614 F.3d at 75. To establish antitrust injury, the
plaintiff must demonstrate: ―(1) harm of the type the antitrust
45
laws were intended to prevent; and (2) an injury to the
plaintiff which flows from that which makes defendant‘s acts
unlawful.‖ Id. at 76 (quoting Gulfstream III Assocs. Inc. v.
Gulfstream Aerospace Corp., 995 F.2d 425, 429 (3d Cir.
1993)) (additional citation omitted).
Our inquiry on appeal has several components. First,
we examine whether the LTAs could reasonably be viewed as
exclusive dealing arrangements, despite the fact that the
LTAs covered less than 100% of the OEMs‘ purchase
requirements and contained no express exclusivity provisions.
Second, because the unique characteristics of the HD
transmissions market bear heavily on our inquiry, we review
Eaton‘s monopoly power, the concentrated nature of the
market, and the ability of a monopolist in Eaton‘s position to
engage in coercive conduct. Third, we discuss the
anticompetitive effects of the various provisions in the LTAs,
and consider Eaton‘s procompetitive justifications for the
agreements. Finally, we consider whether Plaintiffs
established that they suffered antitrust injury as a result of
Eaton‘s conduct.
1. De Facto Partial Exclusive Dealing
A threshold requirement for any exclusive dealing
claim is necessarily the presence of exclusive dealing. Eaton
argues that Plaintiffs‘ claims must fail because the LTAs were
not ―true‖ exclusive dealing arrangements in that they did not
contain express exclusivity requirements, nor did they cover
100% of the OEMs‘ purchases. Neither contention is
persuasive because de facto partial exclusive dealing
46
arrangements may, under certain circumstances, be actionable
under the antitrust laws.14
First, the law is clear that an express exclusivity
requirement is not necessary because de facto exclusive
dealing may be unlawful. Tampa Elec., 365 U.S. at 326;
Dentsply, 399 F.3d at 193; LePage’s, 324 F.3d at 157. For
example, in United States v. Dentsply International, Inc., we
held that transactions which were ―technically only a series of
independent sales‖ could form the basis for an exclusive
dealing claim because the large share of the market held by
the defendant and its conduct in excluding competitors,
―realistically made the arrangements . . . as effective as those
in written contracts.‖ 399 F.3d at 193 (citing Monsanto Co. v.
Spray-Rite Serv. Corp., 465 U.S. 752, 764 n.9 (1984)).
Likewise, in LePage’s, we held that bundled rebates and
discounts offered to major suppliers were designed to and did
14
Our dissenting colleague objects to the phrase ―de
facto partial exclusive dealing‖ as constituting a creative
neologism that ―distorts the English language‖ and
infrequently appears in a search of an online legal database.
Dissenting Op., Part II. ―De facto partial exclusive dealing‖
is certainly a neologism, but it also accurately represents that
an exclusive dealing claim does not require a contract that
imposes an express exclusivity obligation, Tampa Elec., 365
U.S. at 326; Dentsply, 399 F.3d at 193; LePage’s, 324 F.3d at
157, nor a contract that covers 100% of the buyer‘s needs,
Tampa Elec., 365 U.S. at 328 (―[T]he competition foreclosed
by the contract must be found to constitute a substantial share
of the relevant market.‖) (emphasis added).
47
operate as exclusive dealing arrangements, despite the lack of
any express exclusivity requirements. 324 F.3d at 157-58.
Here, there was sufficient evidence from which a jury
could infer that, although the LTAs did not expressly require
the OEMs to meet the market penetration targets, the targets
were as effective as mandatory purchase requirements. See
Tampa Elec., 365 U.S. at 326 (noting that ―even though a
contract does ‗not contain specific agreements not to use the
(goods) of a competitor,‘ if ‗the practical effect is to prevent
such use,‘ it comes within the condition of [Section 3] as to
exclusivity‖) (citing United Shoe Mach. Corp. v. United
States, 258 U.S. 451, 457 (1922)); Dentsply, 399 F.3d at 193-
94. Evidence presented at trial indicated that not only were
lower prices (rebates) conditioned on the OEMs meeting the
market-share targets, but so too was Eaton‘s continued
compliance with the LTAs. For example, Eaton‘s LTAs with
Freightliner, the largest OEM, and Volvo explicitly gave
Eaton the right to terminate the agreements if the market-
share targets were not met. And despite the fact that Eaton
did not actually terminate the agreements on the rare occasion
when an OEM failed to meet its target, the OEMs believed
that it might.15 Critically, due to Eaton‘s position as the
dominant supplier, no OEM could satisfy customer demand
without at least some Eaton products, and therefore no OEM
could afford to lose Eaton as a supplier. Accordingly, we
agree with the District Court that a jury could have concluded
15
In 2003, for example, PACCAR failed to meet its
market penetration target, and although Eaton withdrew all
contractual savings, it did not terminate the agreement.
48
that, under the circumstances, the market penetration targets
were as effective as express purchase requirements ―because
no risk averse business would jeopardize its relationship with
the largest manufacturer of transmissions in the market.‖ ZF
Meritor, 769 F. Supp. 2d at 692.
Second, an agreement does not need to be 100%
exclusive in order to meet the legal requirements of exclusive
dealing. We acknowledge that ―partial‖ exclusive dealing is
rarely a valid antitrust theory. See Barr Labs., 978 F.2d at110 n.24 (―An agreement affecting less than all purchases
does not amount to true exclusive dealing.‖) (citation
omitted); Concord Boat, 207 F.3d at 1044, 1062-63 (noting
that the defendant‘s discount program, which conditioned
incremental discounts on customers purchasing 60-80% of
their needs from the defendant, did not constitute exclusive
dealing because customers were not required to purchase all
of their requirements from the defendant, and in fact, could
purchase up to 40% of their requirements from other sellers
without foregoing the discounts); Magnus Petroleum Co. v.
Skelly Oil Co., 599 F.2d 196, 200-01 (7th Cir. 1979) (holding
that contract requiring buyer to purchase a fixed quantity of
goods that amounted to roughly 60-80% of its needs was not
unlawful ―[b]ecause the agreements contained no exclusive
dealing clause and did not require [the buyer] to purchase any
amounts of [the defendant‘s product] that even approached
[its] requirements‖) (citations omitted). Partial exclusive
dealing agreements such as partial requirements contracts and
contracts stipulating a fixed dollar or quantity amount are
generally lawful because market foreclosure is only partial,
and competing sellers are not prevented from selling to the
49
buyer. See Concord Boat, 207 F.3d at 1062-63; Magnus
Petroleum, 599 F.2d at 200-01.
However, we decline to adopt Eaton‘s view that a
requirements contract covering less than 100% of the buyer‘s
needs can never be an unlawful exclusive dealing
arrangement. See Eastman Kodak, 504 U.S. at 466-67
(―Legal presumptions that rest on formalistic distinctions
rather than actual market realities are generally disfavored in
antitrust law.‖). ―Antitrust analysis must always be attuned to
the particular structure and circumstances of the industry at
issue.‖ Verizon Commc’ns, 540 U.S. at 411. Therefore, just
as ―total foreclosure‖ is not required for an exclusive dealing
arrangement to be unlawful, nor is complete exclusivity
required with each customer. See Dentsply, 399 F.3d at 191.
The legality of such an arrangement ultimately depends on
whether the agreement foreclosed a substantial share of the
relevant market such that competition was harmed. Tampa
Elec., 365 U.S. at 326-28.
In our case, although the market-share targets covered
less than 100% of the OEMs‘ needs, a jury could nevertheless
find that the LTAs unlawfully foreclosed competition in a
substantial share of the HD transmissions market. See id.There are only four direct purchasers of HD transmissions in
North America, and Eaton, long the dominant supplier in the
industry, entered into long-term agreements with each of
them. Compare Concord Boat, 207 F.3d at 1044 (noting the
defendant was the market leader, but there were at least ten
other competing manufacturers). Each LTA imposed a
market-penetration target of roughly 90% (with the exception
of Volvo, which manufactured some of its own transmissions
50
for use in its own trucks), which we explained above, could
be viewed as a requirement that the OEM purchase that
percentage of its requirements from Eaton. Although no
agreement was completely exclusive, the foreclosure that
resulted was no different than it would be in a market with
many customers where a dominant supplier enters into
complete exclusive dealing arrangements with 90% of the
customer base. Under such circumstances, the lack of
complete exclusivity in each contract does not preclude
Plaintiffs‘ de facto exclusive dealing claim.16
2. Market Conditions in HD Transmissions Market
Exclusive dealing will generally only be unlawful
where the market is highly concentrated, the defendant
possesses significant market power, and there is some
element of coercion present. See Tampa Elec., 365 U.S. at
329; Race Tires, 614 F.3d at 77-78; LePage’s, 324 F.3d at
159. For example, if the defendant occupies a dominant
position in the market, its exclusive dealing arrangements
invariably have the power to exclude rivals. Tampa Elec.,
365 U.S. at 329; Dentsply, 399 F.3d at 187. Here, the jury
16
Additionally, the District Court instructed the jury
that Plaintiffs did not allege ―actual‖ exclusive dealing, but
instead alleged that ―the long-term supply contracts with
defendant, in effect, committed the OEMs to purchase at least
a substantial share of their transmissions from defendant.‖
The District Court defined such an arrangement as a ―‗de
facto‘ exclusive dealing contract.‖ Eaton does not challenge
this instruction on appeal.
51
found that Eaton possessed monopoly power in the HD
transmissions market, and Eaton does not contest that finding
on appeal.
A hard look at the nature of the market in which the
parties compete is equally important. Tampa Elec., 365 U.S.
at 329. An exclusive dealing arrangement is most likely to
present a threat to competition in a situation in which the
market is highly concentrated, such that long-term contracts
operate to ―foreclose so large a percentage of the available
supply or outlets that entry‖ or continued operation in ―the
concentrated market is unreasonably constricted.‖ Race
Tires, 614 F.3d at 76 (quoting E. Food Servs., 357 F.3d at 8);
see Dentsply, 399 F.3d at 184 (noting that the relevant market
was ―marked by a low or no-growth potential‖ and the
defendant had long dominated the industry with a 75-80%
market share). Here, the HD transmissions market had long
been dominated by Eaton. Except for Meritor‘s production of
manual transmissions in the 1990s and the ZF Meritor joint
venture, no significant external supplier has entered the
market for the last twenty years. A jury could certainly infer
that Eaton‘s dominance over the OEMs created a barrier to
entry that any potential rival manufacturer would have to
confront. See Concord Boat, 207 F.3d at 1059 (―If entry
barriers to new firms are not significant, it may be difficult
for even a monopoly company to control prices through some
type of exclusive dealing arrangement because a new firm or
firms easily can enter the market to challenge it [but] [i]f
there are significant entry barriers . . . , a potential competitor
would have difficulty entering.‖) (citations omitted). The
record shows that the barriers to entry in the North American
52
HD transmission market are especially high: HD
transmissions are expensive to produce; transmissions
developed for other geographic markets must be substantially
modified for the North American market; and all HD
transmission sales must pass through the highly concentrated
intermediate market in which the OEMs operate. Eaton‘s
theory that ZF Meritor or any new HD transmissions
manufacturer would be able to ―steal‖ an Eaton customer by
offering a superior product at a lower price ―simply has not
proved to be realistic.‖ Dentsply, 399 F.3d at 194 (citation
omitted); compare NicSand, 507 F.3d at 454 (in finding
exclusive dealing arrangements lawful, noting that the
plaintiff was the market leader, and lost business due to a new
entrant‘s competition). ―The paltry penetration in the market
by competitors over the years has been a refutation of
[Eaton‘s] theory by tangible and measurable results in the real
world.‖ Dentsply, 399 F.3d at 194; see Microsoft, 253 F.3d at
55 (noting importance of significant barriers to entry in
maintaining monopoly power, in spite of the plaintiffs‘ self-
imposed problems).
Although we generally ―assume that a customer will
make [its] decision only on the merits,‖ Santana Prods., Inc.
v. Bobrick Washroom Equip., Inc., 401 F.3d 123, 133 (3d Cir.
2005) (quoting Stearns Airport Equip. Co. v. FMC Corp., 170
F.3d 518, 524-25 (5th Cir. 1999)), a monopolist may use its
power to break the competitive mechanism and deprive
customers of the ability to make a meaningful choice. See
Race Tires, 614 F.3d at 77 (noting that coercion ―has played a
key, if sometimes unexplored, role‖ in antitrust law);
Dentsply, 399 F.3d at 184 (observing that the defendant
53
―imposed‖ an exclusivity policy on its customers); LePage’s,
324 F.3d at 159 (explaining that because 3M occupied a
dominant position in several different product markets, it was
able to effectively force customers in the ―private label‖ tape
market to deal with 3M exclusively, despite the plaintiff‘s
competitiveness in that market). A highly concentrated
market, in which there is one (or a few) dominant supplier(s),
creates the possibility for such coercion. And here, there was
evidence that Eaton leveraged its position as a supplier of
necessary products to coerce the OEMs into entering into the
LTAs. Plaintiffs presented testimony from OEM officials
that many of the terms of the LTAs were unfavorable to the
OEMs and their customers, but that the OEMs agreed to such
terms because without Eaton‘s transmissions, the OEMs
would be unable to satisfy customer demand.17
17
Eaton emphasizes that the OEMs are multi-billion
dollar companies (or at least owned by multi-billion dollar
parent companies), and therefore claims that the OEMs
dictated terms to Eaton – not the other way around.
Significantly, in United States v. Dentsply International, Inc.,
we found coercion even though the relationship between the
customers and the defendant was not totally one-sided. 399
F.3d 181, 185 (3d Cir. 2005) (noting that the defendant
considered bypassing dealers and selling directly to customers
but abandoned that strategy out of fear that dealers might
retaliate by refusing to buy other products manufactured by
the defendant). Moreover, even assuming that the evidence
could support a conclusion that the OEMs had more power in
the relationship, the fact that two reasonable conclusions
54
Accordingly, this case involves precisely the
combination of factors that we explained would be present in
the rare case in which exclusive dealing would pose a threat
to competition. See Race Tires, 614 F.3d at 76.
3. Sufficiency of the Evidence: Anticompetitive Conduct
We turn now to a discussion of whether there was
sufficient evidence for a jury to conclude that Eaton engaged
in anticompetitive conduct. Our inquiry in a sufficiency of
the evidence challenge is limited to determining whether,
―viewing the evidence in the light most favorable to the
[winner at trial] and giving it the advantage of every fair and
reasonable inference, there is insufficient evidence from
which a jury reasonably could find liability.‖ Lightning Lube,
Inc. v. Witco Corp., 4 F.3d 1153, 1166 (3d Cir. 1993)
(citation omitted). Eaton argues that even under the
extraordinarily deferential standard, there was insufficient
evidence for a reasonable jury to conclude that Eaton engaged
in conduct that harmed competition. Guided by the principles
set forth in Section III.A.1, supra, we disagree.
i. Extent of Foreclosure
First, the extent of the market foreclosure in this case
was significant. ―The share of the market foreclosed is
important because, for the contract to have an adverse effect
upon competition, ‗the opportunities for other[s] . . . to enter
could be drawn from the evidence does not make the jury‘s
adoption of Plaintiffs‘ view unreasonable.
55
into or remain in that market must be significantly limited.‘‖
Microsoft, 253 F.3d at 69 (citing Tampa Elec., 365 U.S. at
328). Substantial foreclosure allows the dominant firm to
prevent potential rivals from ever reaching ―the critical level
necessary‖ to pose a real threat to the defendant‘s business.
Dentsply, 339 F.3d at 191. Here, Eaton entered into long-
term agreements with every direct purchaser in the market,
and under each agreement, imposed what could be viewed as
mandatory purchase requirements of at least 80%, and up to
97.5%. The OEMs generally met these targets, which, as
Plaintiffs‘ expert testified, resulted in approximately 15% of
the market remaining open to Eaton‘s competitors by 2003.18
See LePage’s, 324 F.3d at 159 (noting that foreclosure of
40% to 50% is usually required to establish an exclusive
18
ZF Meritor‘s expert, Dr. David DeRamus, testified
at trial that Eaton‘s market share was consistently above 80%
from 2000 through 2007. Later in his testimony, DeRamus
concluded that Eaton‘s increased market share from 2000 to
2007 was the result of the LTAs. Furthermore, DeRamus
showed that ZF Meritor‘s market share percentages in the
linehaul transmissions market (i.e., the only portion of the
overall HD transmissions market in which ZF Meritor
competed), dropped from 32% to 24% between 2000 and
2002, and dropped even further from 24% to 12% between
2002 and 2003, before ultimately falling to 0% in 2007.
DeRamus concluded that the loss of ZF Meritor‘s linehaul
transmissions market share and its eventual exit from the
market were due to Eaton‘s conduct and, specifically, the
LTAs.
56
dealing violation under Section 1 of the Sherman Act (citing
Microsoft, 253 F.3d at 70)). From 2000 through 2003,
Plaintiffs‘ overall market share ranged from 8-14%, and by
2005, Plaintiffs‘ market share had dropped to 4%.
ii. Duration of LTAs
Second, the LTAs were not short-term agreements,
which would present little threat to competition. See, e.g.,
Christofferson Dairy, Inc. v. MMM Sales, Inc., 849 F.2d
1168, 1173 (9th Cir. 1988) (upholding exclusive dealing
arrangement of ―short duration‖); Roland Mach. Co. v.
Dresser Indus., Inc., 749 F.2d 380, 395 (7th Cir. 1984)
(noting that exclusive dealing contracts of less than one year
are presumptively lawful); Barry Wright, 724 F.2d at 237
(citing two-year term in upholding requirements contract).
Rather, each LTA was for a term of at least five years, and the
PACCAR LTA was for a seven-year term.19 See FTC v.
Motion Picture Adver. Serv. Co., 344 U.S. 392, 393-96
(1953) (upholding contracts of one year or less, but
condemning contract terms ranging from two to five years).
Although long exclusive dealing contracts are not per se
unlawful, ―[t]he significance of any particular contract
duration is a function of both the number of such contracts
and market share covered by the exclusive-dealing contracts.‖
Hovenkamp ¶ 1802g, at 98. Here, Eaton entered into long-
term contracts with every direct purchaser in the market,
which locked up over 85% of the market for at least five
19
Eaton and Freightliner revised their original LTA to
increase the duration to ten years.
57
years. Although long-term agreements had previously been
used in the HD transmissions industry, it was unprecedented
for a supplier to enter into contracts of such duration with the
entire customer base.
Eaton acknowledges, as it must, the unprecedented
length of the LTAs, but maintains that the LTAs were not
anticompetitive because they were easily terminable. See,
e.g., PepsiCo, Inc. v. Coca-Cola Co., 315 F.3d 101, 111 (2d
Cir. 2002) (finding challenged contracts lawful, in part,
because they were terminable at will); Omega Envtl., 127
F.3d at 1164 (noting easy terminability of agreements). Each
LTA included a ―competitiveness‖ clause, which permitted
the OEM to purchase from another supplier or terminate the
agreement if another supplier offered a better product or a
lower price. However, Plaintiffs presented evidence that any
language giving OEMs the right to terminate the agreements
was essentially meaningless because Eaton had assured that
there would be no other supplier that could fulfill the OEMs‘
needs or offer a lower price. Thus, a jury could very well
conclude that ―in spite of the legal ease with which the
relationship c[ould] be terminated,‖ the OEMs had a strong
economic incentive to adhere to the terms of the LTAs, and
therefore were not free to walk away from the agreements and
purchase products from the supplier of their choice.
Dentsply, 399 F.3d at 194.
iii. Additional Anticompetitive Provisions in LTAs
Third, the LTAs were replete with provisions that a
reasonable jury could find anticompetitive. To begin, a jury
could have found that the data book provisions were
58
anticompetitive in that they limited the ability of ZF Meritor
to effectively market its products, and limited the ability of
truck buyers to choose from a full menu of available
transmissions. See id. (discussing anticompetitive effect of
limitations on customer choice). Eaton downplays the
significance of the data book provisions, arguing that truck
buyers always remained free to request unlisted
transmissions, and ZF Meritor remained free to market
directly to truck buyers. However, the mere existence of
potential alternative avenues of distribution, without ―an
assessment of their overall significance to the market,‖ is
insufficient to demonstrate that Plaintiffs‘ opportunities to
compete were not foreclosed. Id. at 196. An OEM‘s data
book was the ―most important tool‖ that any buyer selecting
component parts for a truck would use. If a product was not
listed in a data book, it was ―a disaster for the supplier.‖
Although truck buyers could request unpublished
components, doing so involved additional transaction costs,
and in practice, meant that truck buyers were far more likely
to select a product listed in the data book. See id. at 193(explaining that the key question was not whether alternative
distribution methods allowed a competitor to ―survive‖ but
whether the alternative methods would ―pose[] a real threat‖
to the defendant‘s monopoly) (citing Microsoft, 253 F.3d at
71). Additionally, prior to the LTAs, it was not common
practice for one supplier to be given exclusive data book
listing. Historically, data books had included all product
offerings, including Meritor transmissions, and the OEMs
acknowledged that removing ZF Meritor products, especially
FreedomLine, from the data books was ―from a customer
perspective,‖ the wrong thing to do so because they were
59
―good product[s] with considerable demand in the
marketplace.‖
A jury could also have found that the ―preferential
pricing‖ provisions in the LTAs were anticompetitive.
Although it was ―common‖ for price savings to be passed
down to truck buyers in the form of lower prices, and there
are indications that at least some of the savings from Eaton
transmissions were indeed passed down, there is also
evidence that the preferential prices were achieved by
artificially increasing the prices of Plaintiffs‘ products.
Additionally, the jury could have determined that the
―competitiveness‖ clauses were of little practical import
because Eaton‘s conduct ensured that no rival would be able
to offer a comparable deal. There was also evidence that the
competitiveness clauses were met with stiff resistance by
Eaton.
iv. Anticompetitive Effects vs. Procompetitive Effects
Finally, the only procompetitive justification offered
by Eaton on appeal is that the LTAs were crafted to meet
customer demand to reduce prices, as well as engineering and
support costs. See Barr Labs., 978 F.2d at 111 (explaining
that courts must ―evaluate the restrictiveness and the
economic usefulness of the challenged practice in relation to
the business factors extant in the market‖) (citations omitted).
In response to the economic downturn in the heavy-duty
trucking industry in the late 1990s and early 2000s, each
OEM sought to negotiate lower prices, and some sought to
reduce the number of suppliers. During this time, oversupply
60
was a problem, as were low truck prices, and an
unavailability of drivers. It appears that Eaton responded
well to the downturn; despite persistent quality control
problems and a relatively late introduction of two-pedal
automated mechanical transmissions, the company cut costs
and increased market share.
However, no OEM ever asked Eaton to be a sole
supplier, and there was considerable testimony from OEM
officials that it was in an OEM‘s interest to have multiple
suppliers. Although long-term agreements offering market-
share or volume discounts had been used in the industry in the
past (for transmissions and for other truck components), OEM
executives consistently testified that Eaton‘s new LTAs
represented a substantial departure from past practice. For
example, the longest supply agreements Freightliner and
Volvo had ever signed previously were for two-year terms.
Likewise, OEM officials testified that the provisions in the
LTAs requiring exclusive data book listing and ―preferential
pricing‖ were not common. Critically, there was considerable
evidence from which a jury could infer that the primary
purpose of the LTAs was not to meet customer demand, but
to take preemptive steps to block potential competition from
the new ZF Meritor joint venture. Eaton devised the
unprecedented LTAs only after Meritor formed the joint
venture with ZF AG, which Eaton viewed as a ―serious
competitor.‖ Eaton feared that the ZF Meritor joint venture
would put Eaton‘s ―[North American] position at risk‖ by
introducing a new product (FreedomLine) for which there
was significant customer demand, but for which Eaton did not
produce a comparable alternative.
61
In sum, the LTAs included numerous provisions
raising anticompetitive concerns and there was evidence that
Eaton sought to aggressively enforce the agreements, even
when OEMs voiced objections.20 Accordingly, we hold that
there was more than sufficient evidence for a jury to conclude
that the cumulative effect of Eaton‘s conduct was to adversely
affect competition.21
20
Judge Greenberg, in dissent, objects that our rule of
reason analysis fails to consider that Eaton‘s prices were
above cost. Dissenting Op., Part II. However, contrary to
this objection, and even though ZF Meritor does not contend
that Eaton‘s prices operated as an exclusionary tool, we do
not view Eaton‘s prices as irrelevant to the rule of reason
analysis. Rather than analyzing the alleged exclusionary
provisions in a vacuum, we analyze these provisions in the
larger context of the LTAs as a whole, and we recognize that
Eaton maintained above-cost prices. We conclude that ZF
Meritor presented sufficient evidence for the jury to find that,
even though not every provision was exclusionary, the LTAs
as a whole functioned as exclusive dealing agreements that
adversely affected competition.
21
It is worth noting that despite Eaton‘s contention
that Plaintiffs‘ higher prices and quality problems led to their
decline in market share, the OEMs felt differently. In 2002, a
Freightliner executive wrote: ―[t]his is a dangerous situation.
We have already killed Meritor‘s transmission business. It is
just a matter of time before they close their doors.‖ Likewise,
a 2006 Volvo presentation states: ―With all its OEM
customers, Eaton has established long term supply contracts
62
4. Sufficiency of the Evidence: Antitrust Injury
Having concluded that there was sufficient evidence
from which a jury could determine that the LTAs functioned
as unlawful exclusive dealing agreements, we have no
difficulty concluding that there was likewise sufficient
evidence that Plaintiffs suffered antitrust injury. See Atl.
Richfield, 495 U.S. at 344 (explaining that a plaintiff suffers
antitrust injury if its injury ―stems from a competition-
reducing aspect or effect of the defendant‘s behavior‖).
Eaton‘s conduct unlawfully foreclosed a substantial share of
the HD transmissions market, which would otherwise have
been available for rivals, including Plaintiffs. ZF Meritor
exited the market in 2003, followed by Meritor in 2006,
because they could not maintain high enough market shares to
remain viable. A jury could certainly conclude that Plaintiffs‘
inability to grow was a direct result of Eaton‘s exclusionary
conduct.
C. Expert Testimony
1. Expert Testimony on Liability
Eaton raises two challenges to the District Court‘s
decision to admit DeRamus‘s testimony on liability. First,
Eaton argues that DeRamus failed to employ any recognized
or reliable economic test for determining whether Eaton‘s
. . . [which] ha[ve] led to . . . Eaton‘s only North American
competitor, Meritor, [being] gradually marginalized to its
current market position with a 10% market share.‖
63
conduct harmed competition and caused antitrust injury.
Second, Eaton contends that DeRamus‘s opinion was
contradicted by the facts. We disagree with both
22
contentions.
Federal Rule of Evidence 702 provides:
A witness who is qualified as an expert by
knowledge, skill, experience, training, or
education may testify in the form of an opinion
or otherwise if: (a) the expert‘s scientific,
technical, or other specialized knowledge will
help the trier of fact to understand the evidence
or to determine a fact in issue; (b) the testimony
is based on sufficient facts or data; (c) the
testimony is the product of reliable principles
and methods; and (d) the expert has reliably
applied the principles and methods to the facts
of the case.
Under Rule 702, the district court acts as a ―gatekeeper‖ to
ensure that ―the expert‘s opinion [is] based on the methods
and procedures of science rather than on subjective belief or
unsupported speculation.‖ Calhoun v. Yamaha Motor Corp.,
U.S.A., 350 F.3d 316, 321 (3d Cir. 2003) (quoting In re Paoli
R.R. Yard PCB Litig. (Paoli II), 35 F.3d 717, 741 (3d Cir.
22
Eaton also argues that DeRamus‘s testimony was
contrary to law because he did not employ a price-cost test.
However, as we explained above, no price-cost test was
required in this case.
64
1994)). Here, as the District Court noted, DeRamus relied on
the exclusionary nature of the LTAs to form his opinion. He
defined the relevant market, determined whether Eaton has
monopoly power, and engaged in an analysis of Eaton‘s
conduct, taking into account market conditions and the extent
of the exclusive dealing. He examined the effect of the LTAs
on prices and consumer choice, and considered whether
foreclosure of the market could be attributed to factors other
than the LTAs, such as market conditions or quality issues
with Plaintiffs‘ products. We find no error in the District
Court‘s acceptance of DeRamus‘s methodologies as reliable
under Rule 702. See LePage’s, 324 F.3d at 154-64 (analyzing
exclusive dealing by looking to many of the same factors
considered by DeRamus).
Eaton also argues that DeRamus‘s opinion was
contradicted by the facts. ―When an expert opinion is not
supported by sufficient facts to validate it in the eyes of the
law, or when indisputable record facts contradict or otherwise
render the opinion unreasonable, it cannot support a jury‘s
verdict.‖ Brooke Grp., 509 U.S. at 242; Phila. Newspapers,
51 F.3d at 1198. In an antitrust case, an expert opinion
generally must ―incorporate all aspects of the economic
reality‖ of the relevant market. Concord Boat, 207 F.3d at
1057. Here, the District Court properly rejected Eaton‘s
argument that DeRamus‘s testimony should have been
excluded on the basis that it was contradicted by other facts.
Eaton‘s argument on this point really amounts to nothing
more than a complaint that DeRamus did not adopt Eaton‘s
view of the case. The District Court correctly noted that,
although some of DeRamus‘s testimony may have been
65
contradicted by other evidence, including the testimony of
Eaton‘s expert, the existence of conflicting evidence was not
a basis on which to exclude DeRamus‘s testimony. The
respective credibility of Plaintiffs‘ and Eaton‘s experts was a
question for the jury to decide. LePage’s, 324 F.3d at 165.
DeRamus was extensively cross-examined and Eaton
presented testimony from its own expert, who opined that the
LTAs had no anticompetitive effect. In the end, the jury
apparently found DeRamus to be more credible. ―[Eaton]‘s
disappointment as to the jury‘s finding of credibility does not
constitute an abuse of discretion by the District Court in
allowing [DeRamus‘s] testimony.‖ Id. at 166.
2. Expert Testimony on Damages
In their cross-appeal, Plaintiffs argue that the District
Court erred in excluding DeRamus‘s testimony on the issue
of damages. The core of DeRamus‘s damages analysis was
one page (titled ―Five Year Product Line Profit and Loss‖) of
ZF Meritor‘s Revised Strategic Business Plan (―SBP‖) for
fiscal years 2002 through 2005, which was presented to ZF
Meritor‘s Board of Directors in November 2000.23 The
District Court determined that, although DeRamus used
methodologies regularly employed by economists, his opinion
nevertheless failed the reliability requirements of Daubert and
the Federal Rules of Evidence because the underlying data
23
The SBP contained a five-year forecast of profit and
loss estimates based on estimated unit sales, unit prices,
manufacturing costs, operating expenses, and other
considerations.
66
was not sufficiently reliable. The District Court
acknowledged that experts often rely on business plans in
forming damages estimates, but concluded that DeRamus‘s
reliance on the SBP in this case was improper because he did
not know either the qualifications of the individuals who
prepared the SBP estimates or the assumptions upon which
the estimates were based. Plaintiffs filed a motion for
clarification, which asked the District Court to allow
DeRamus to testify based on his existing expert report to
damages estimates independent of the SBP, or, in the
alternative, to allow him to amend his report to include the
alternate damages estimates. The District Court did not
resolve the damages issue at that time, and bifurcated the
case. After the trial on liability, Plaintiffs supplemented their
pre-trial motion for clarification, adding several new
arguments based on developments at trial, and renewing their
request that DeRamus be allowed to testify based on alternate
calculations. The District Court denied Plaintiffs‘ motion and
awarded $0 in damages.
Our inquiry on appeal is two-fold. Initially, we must
determine whether the District Court erred in excluding the
expert opinion of DeRamus on the basis that it was not
sufficiently reliable. Then, we must consider whether the
District Court abused its discretion in denying Plaintiffs‘
request to allow DeRamus to testify to alternative damages
calculations. We will address these issues in turn.
i. DeRamus‘s original damages calculations
First, we will consider Plaintiffs‘ contention that the
District Court erred in determining that DeRamus‘s damages
67
opinion was not sufficiently reliable. Federal Rule of
Evidence 702, as amended in 2000 to incorporate the
standards set forth in Daubert, imposes an obligation upon a
district court to ensure that expert testimony is not only
relevant, but reliable. Fed. R. Evid. 702; Paoli II, 35 F.3d at
744. As we have made clear, ―the reliability analysis
[required by Daubert] applies to all aspects of an expert‘s
testimony: the methodology, the facts underlying the expert‘s
opinion, [and] the link between the facts and the conclusion.‖
Heller v. Shaw Indus., Inc., 167 F.3d 146, 155 (3d Cir. 1999);
see also id. (―Not only must each stage of the expert‘s
testimony be reliable, but each stage must be evaluated
practically and flexibly without bright-line exclusionary (or
inclusionary) rules.‖). As we explain below, the District
Court did not abuse its discretion by finding that DeRamus‘s
damages estimate, which was based heavily on the SPB
projections, bore insufficient indicia of reliability to be
submitted to a jury.
To determine the damages suffered by Plaintiffs as a
result of Eaton‘s anticompetitive conduct, DeRamus
conducted a two-part analysis. He computed Plaintiffs‘ lost
profits for the period between 2000 and 2009, as well as the
lost enterprise value of Plaintiffs‘ HD transmissions business.
To calculate Plaintiffs‘ lost profits, DeRamus first estimated
the incremental revenues that Plaintiffs would have earned
―but for‖ Eaton‘s anticompetitive conduct, and then
subtracted from that figure the incremental cost that Plaintiffs
would have had to incur to achieve such incremental sales.
Ordinarily, such an approach would be appropriate
because ―an expert may construct a reasonable offense-free
68
world as a yardstick for measuring what, hypothetically,
would have happened ‗but for‘ the defendant‘s unlawful
activities.‖ LePage’s, 324 F.3d at 165 (citations omitted).
However, the District Court‘s primary criticism of
DeRamus‘s report was that he did not construct an offense-
free world based on actual financial data, but instead relied on
a one-page set of profit and volume projections without
knowing the circumstances under which such projections
were created or the assumptions on which they were based.
In some circumstances, an expert might be able to rely on the
estimates of others in constructing a hypothetical reality, but
to do so, the expert must explain why he relied on such
estimates and must demonstrate why he believed the
estimates were reliable. See Fed. R. Evid. 702; Daubert, 509
U.S. at 592-95; Paoli II, 35 F.3d at 748 n.18 (―Arguably,
[third-party estimates] that an expert relies on are not his
underlying data, but rather the data that went into the [third-
party estimates] in the first place are his underlying data.‖).
Plaintiffs contend that DeRamus‘s reliance on the SBP
estimates was appropriate because a company‘s internal
financial projections, like those in the SBP, are regularly and
reasonably relied upon by economists in formulating opinions
regarding a company‘s performance in an offense-free world.
Plaintiffs are certainly correct that ―internal projections for
future growth‖ often serve as legitimate bases for expert
opinions. See LePage’s, 324 F.3d at 165; Autowest, Inc. v.
Peugeot, Inc., 434 F.2d 556, 566 (2d Cir. 1970) (holding that
damages testimony was admissible because the financial
projections on which the testimony was based ―were the
product of deliberation by experienced businessmen charting
69
their future course‖). Businesses are generally well-informed
about the industries in which they operate, and have
incentives to develop accurate projections. As such, experts
frequently use a plaintiff‘s business plan to estimate the
plaintiff‘s expected profits in the absence of the defendant‘s
misconduct. See Litigation Services Handbook: The Role of
the Financial Expert 24:13 (4th ed. 2007). However, there is
no per se rule of inclusion where an expert relies on a
business plan; district courts must perform a case-by-case
inquiry to determine whether the expert‘s reliance on the
business plan in a given case is reasonable. See Heller, 167
F.3d at 155.
Here, the District Court concluded that the SBP could
not serve as a reliable basis for DeRamus‘s opinion because
he was unaware of the qualifications of the individuals who
prepared the document, or the assumptions on which the
estimates were based. Plaintiffs argue that these factual
findings are contradicted by the record. Admittedly, the
record indicates that DeRamus did not, as the District Court
suggested, blindly accept the SBP estimates without question.
DeRamus was aware that the SBP had been presented to ZF
Meritor‘s Board of Directors, and that it was revised several
times to ―address and resolve queries management had about
the reasonableness of the assumptions, projections, [and]
forecasts.‖ He also knew that the Board had relied on the
SBP in making business decisions. Moreover, ZF Meritor‘s
former president testified that he ―did not submit SBPs to
management for review unless [he] believed the projections,
forecasts, and assumptions therein to be reliable.‖
70
However, contrary to Plaintiffs‘ assertions, these
excerpts from the record do not contradict the District Court‘s
ultimate findings. The record amply supports the District
Court‘s concern that, although DeRamus was generally aware
of the circumstances under which the SBP was created and
the purposes for which it was used, he lacked critical
information that would be necessary for Eaton to effectively
cross-examine him. An expert‘s ―lack of familiarity with the
methods and the reasons underlying [someone else‘s]
projections virtually preclude[s] any assessment of the
validity of the projections through cross-examination.‖ TK-7
Corp. v. Estate of Barbouti, 993 F.2d 722, 732 (10th Cir.
1993); compare Autowest, 434 F.2d at 566 (holding that
projections of company officials were admissible where such
officials ―set out at length the bases from which they derived
their figures, and consequently, [the opposing party] was able
to cross-examine them vigorously‖). Here, DeRamus knew
that the SBP was presented to the Board by experienced
management professionals, but he did not know who initially
calculated the SBP figures. He did not know whether the
SBP projections were calculated by ZF Meritor management,
lower level employees at ZF Meritor, or came from some
outside source. Nor did DeRamus know the methodology
used to create the SBP or the assumptions on which the SBP‘s
price and volume estimates were based.24
24
As the District Court noted, it is especially important
for an expert to identify and justify the assumptions
underlying financial projections when dealing with a new
company. Here, although Meritor had been in the HD
71
Under the deferential abuse of discretion standard, we
will not disturb a district court‘s decision to exclude
testimony unless we are left with ―a definite and firm
conviction that the court below committed a clear error of
judgment.‖ In re TMI Litig., 193 F.3d 613, 666 (3d Cir.
1999) (citation omitted). Plaintiffs cannot clear that high
hurdle. Accordingly, we conclude that the District Court
acted within its discretion in determining that one page of
financial projections for a nascent company, the assumptions
underlying which were relatively unknown, did not provide
―good grounds,‖ Paoli II, 35 F.3d at 742 (quoting Daubert,
509 U.S. at 590), for DeRamus to generate his damages
estimate. Compare LePage’s, 324 F.3d at 165 (noting that
plaintiff‘s expert considered the defendant‘s internal
projections for growth, but also closely examined the market
conditions, including the past performance of competitors).
Plaintiffs raise two additional challenges to the District
Court‘s exclusion of DeRamus‘s testimony. First, Plaintiffs
contend that because the SBP was admitted into evidence at
trial, Rule 703 does not provide a basis for exclusion.
However, this argument is based on the flawed assumption
that the District Court excluded DeRamus‘s testimony under
Rule 703, rather than Rule 702. Plaintiffs assume that
because the District Court stated that ―DeRamus manipulated
the SBP using methodologies employed by economists,‖ ZF
Meritor, 646 F. Supp. 2d at 667, the District Court necessarily
transmissions industry for over a decade, ZF Meritor was
offering a brand new line of transmissions that had never
before been sold in the North American market.
72
concluded that Rule 702, which focuses on methodologies,
was satisfied. However, the District Court explicitly stated
that ―the fundamental query‖ was ―whether the [SBP]
estimates pass[ed] the reliability requirements of Rules 104,
702, and 703.‖ Id. Although it is not entirely clear from the
District Court‘s opinion which rule the District Court relied
upon in finding DeRamus‘s testimony inadmissible, we may
affirm evidentiary rulings on any ground supported by the
record, Hughes v. Long, 242 F.3d 121, 122 n.1 (3d Cir. 2001),
and we conclude that DeRamus‘s opinion was properly
excluded because it failed the reliability requirements of Rule
702.25
Plaintiffs‘ suggestion that the reasonableness of an
expert‘s reliance on facts or data to form his opinion is
somehow an inappropriate inquiry under Rule 702 results
25
We base our affirmance of the District Court‘s
decision entirely on the fact that DeRamus‘s opinion failed
Rule 702, and do not decide whether Rule 703 provides an
additional basis for exclusion. We note, however, that
Plaintiffs‘ argument that Rule 703 somehow constrains a
district court‘s ability to conduct an assessment of reliability
under Rule 702 is misplaced. After all, a piece of evidence
may be relevant for one purpose, and thus admissible at trial,
but not be the type of information that can form the basis of a
reliable expert opinion. As the District Court stated, ―the fact
that [a piece of evidence] [i]s part of [the] plaintiffs‘ ‗story‘
does not mean, ipso facto,‖ that an expert opinion relying on
such evidence is admissible. ZF Meritor LLC v. Eaton Corp.,
800 F. Supp. 2d 633, 637 (D. Del. 2011).
73
from an unduly myopic interpretation of Rule 702 and ignores
the mandate of Daubert that the district court must act as a
gatekeeper. See Daubert, 509 U.S. at 589; Heller, 167 F.3d at
153 (―While ‗the focus, of course, must be solely on
principles and methodology, not on the conclusions that they
generate,‘ a district court must examine the expert‘s
conclusions in order to determine whether they could reliably
flow from the facts known to the expert and the methodology
used.‖) (emphasis added) (quoting Daubert, 509 U.S. at 595).
Where proffered expert testimony‘s ―factual basis, data,
principles, methods, or their application are called sufficiently
into question, . . . the trial judge must determine whether the
testimony has ‗a reliable basis in the knowledge and
experience of the relevant discipline.‘‖ Kumho Tire Co. v.
Carmichael, 526 U.S. 137, 149 (1999) (quoting Daubert, 509
U.S. at 592). A district court‘s inquiry under Rule 702 is ―a
flexible one‖ and must be guided by the facts of the case.
Daubert, 509 U.S. at 591, 594. Here, the District Court‘s
analysis fell squarely within its flexible gatekeeping function
under Daubert and Rule 702. See Kumho Tire Co. 526 U.S.
at 149; Paoli II, 35 F.3d at 748 n.18; see also Elcock, 233
F.3d at 754 (explaining that an expert‘s testimony regarding
damages must be based on a sufficient factual foundation);
Tyger Constr. Co. v. Pensacola Constr. Co., 29 F.3d 137, 142
(4th Cir. 1994) (―An expert‘s opinion should be excluded
when it is based on assumptions which are speculative and
not supported by the record.‖).
Second, Plaintiffs argue that the District Court did not
provide fair notice that it intended to exclude DeRamus‘s
testimony under Federal Rule of Evidence 703. Again, this
74
argument rests on the flawed assumption that the District
Court relied solely on Rule 703. However, even assuming the
District Court mistakenly believed that its Rule 702 reliability
analysis actually fell under Rule 703, Plaintiffs‘ notice
argument would still be meritless. A district court must give
the parties ―an adequate opportunity to be heard on
evidentiary issues.‖ In re Paoli R.R. Yard PCB Litig. (Paoli
I), 916 F.2d 829, 854 (3d Cir. 1990). Here, there was
extensive briefing regarding DeRamus‘s damages opinion,
much of which focused on Eaton‘s argument that DeRamus‘s
reliance on the SBP was improper. The District Court held
not one, but two in limine hearings, in which DeRamus
testified for several hours. Compare id. at 854-55 (holding
that the district court did not give the plaintiffs an adequate
opportunity to be heard where it failed to conduct an in limine
hearing and denied oral argument on the evidentiary issues).
As such, Plaintiffs were well aware of, and had ample
opportunity to be heard on, the question of whether
DeRamus‘s reliance on the SBP rendered his testimony
inadmissible.
ii. Alternate damages calculations
The District Court‘s opinion excluding DeRamus‘s
damages testimony focused exclusively on DeRamus‘s
damages estimates based on the SBP projections regarding
ZF Meritor‘s market share and profit margin. However, his
expert report also set forth market-share estimates based on
an econometric model. The econometric model did not
consider the SBP, but instead used economic variables, such
as the number of heavy-duty trucks built and sold in the North
American market, an index of consumer confidence in the
75
United States, the average wholesale price of oil in the United
States, and interest rates. The model also considered ZF
Meritor‘s market share from the previous month ―in order to
capture market dynamics.‖
To reach his ultimate damages estimate, DeRamus
averaged several damages calculations, each of which used a
different combination of inputs for market share and profit
margin. Following the District Court‘s order excluding
DeRamus‘s testimony due to his reliance on the SBP,
Plaintiffs filed a motion for clarification, asking the District
Court to allow DeRamus to calculate damages using the same
methodologies from his expert report, but using data
independent of the SBP. Specifically, Plaintiffs proposed
several revisions to DeRamus‘s damages estimate. First,
Plaintiffs indicated that DeRamus could revise his ―Eaton
Operating Profit Method,‖ which used as principal inputs the
SBP estimates for market share and Eaton‘s actual operating
profits for profit margin. Plaintiffs stated that DeRamus had
recalculated lost profits using the same methodology, but
replacing the market-share data from the SBP with market-
share data from his econometric model. Second, Plaintiffs
explained that DeRamus could similarly revise his
―Econometric Method‖ of calculating lost profits, which used
the econometric model for market share, and data from the
SBP for profit margin. He could use the same methodology
and replace the profit margin data from the SBP with profit
76
margin data from Plaintiffs‘ actual sales data from 1996
through 2000.26
Noting that all of the data necessary for DeRamus‘s
recalculations were already in the expert report, Plaintiffs
requested that DeRamus be able to testify to the alternate
calculations using the existing expert report. Allowing
DeRamus to testify to alternate damages numbers without
amending his expert report would have left Eaton without
advance notice of the new calculations, and thus would have
been improper. As such, the District Court did not err in
ruling that DeRamus could not testify to new calculations
based on the existing expert report. However, the District
Court‘s refusal to allow DeRamus to amend his expert report
presents a much more difficult question, one that we will
explore in depth.
Before beginning our analysis, it is necessary to
provide some context regarding the procedural history
because the way in which the damages issue was handled by
the District Court is significant to our determination that the
District Court abused its discretion. After the District Court
granted Eaton‘s motion to exclude DeRamus‘s damages
testimony, it granted leave for Plaintiffs to file a motion for
clarification to identify damages calculations in DeRamus‘s
expert report that were not based on the SBP. On September
26
Although the District Court did not address
DeRamus‘s lost enterprise value calculations, Plaintiffs
indicated in their motion for clarification that DeRamus could
make similar revisions to those calculations.
77
9, 2009, ten days before trial was set to begin, Plaintiffs filed
the motion, acknowledging that new calculations would be
required, but submitting that all of the necessary data was
already in the report. The next day, the District Court held a
pretrial conference, in which it considered Plaintiffs‘ motion,
and determined that it had two options: to ―basically punt‖ on
the damages issue and bifurcate the case, or to allow
Plaintiffs‘ new damages theory to go forward and allow Eaton
to depose DeRamus to examine his new theories. The
District Court concluded that the ―cleanest‖ option was to
defer the damages issue, bifurcate, and proceed to trial on
liability. That way, the District Court stated, the damages
issue would only need to be resolved if ―the jury c[ame] back
with a plaintiffs‘ verdict, which [was] [up]held on appeal.‖ In
opting to defer a decision on damages, the District Court
noted that it ―did not . . . at the moment, have the time to
parse [DeRamus‘s report] as carefully‖ as would be necessary
to satisfactorily address the parties‘ arguments regarding
damages.
The jury delivered its verdict on liability on October 8,
2009, and the District Court entered judgment in favor of
Plaintiffs on October 14. Two days later, Plaintiffs requested
that the District Court set a trial on damages. Eaton opposed
Plaintiffs‘ request, asserting that the judgment on liability was
a final appealable decision. Although the District Court
apparently agreed with Eaton initially, stating that it ―d[id]
not intend to address damages until liability has been finally
resolved by the Third Circuit,‖ the District Court
subsequently issued an amended judgment, which stated that
because damages had not been resolved, there was no final
78
appealable order under Federal Rule of Civil Procedure 54(b).
On November 3, 2009, Eaton filed its renewed motion for
judgment as a matter of law or a new trial. The District Court
did not rule on the motion until March 2011.27
Following the District Court‘s denial of Eaton‘s
motion, Plaintiffs renewed their request for a damages trial.
On July 25, 2011, the District Court held a status conference,
in which it heard arguments on whether the liability issue was
appealable as a judgment on fewer than all claims under Rule
54(b). Although the District Court initially indicated that it
would proceed under Rule 54(b), and once again defer
resolution of the damages issue, after both parties agreed that
the judgment on liability was not appealable under Rule 54(b)
(and that it was unlikely that this Court would grant an
interlocutory appeal), the District Court acknowledged that it
would ―need to go back to the papers and see how I extract
myself from the procedural morass that I put myself in.‖ The
District Court then signaled the way in which it would extract
itself, stating ―so let‘s assume that I am going to resurrect a
motion that is two years old [Plaintiffs‘ September 3, 2009
motion for clarification], and let‘s assume that I deny it, and
we‘re left with the situation we have now. At that point,
would it make sense to have a cross-appeal on liability, on the
Daubert decision, and get it up to the Third Circuit?‖
27
It is unclear from the record why sixteen months
passed between Eaton‘s motion and the District Court‘s
decision on the motion.
79
Several days later, on August 4, 2011, the District
Court issued a memorandum opinion and order denying
Plaintiffs‘ motion for clarification, and awarding $0 in
damages. The District Court‘s entire analysis of Plaintiffs‘
request to modify DeRamus‘s report consisted of one
paragraph. The District Court concluded that allowing
Plaintiffs to amend DeRamus‘s expert report ―would be
tantamount to reopening expert discovery‖ because DeRamus
would need to be deposed again and Eaton would have to
prepare another rebuttal expert report. The District Court also
noted that, when it granted leave for Plaintiffs to move for
clarification, leave was granted only for Plaintiffs to show
that DeRamus‘s report already contained an alternate
damages calculation, and that Plaintiffs‘ motion requested
permission to submit additional damages calculations.
Therefore, the District Court concluded, ―[a]t this stage of the
litigation,‖ it would not give Plaintiffs an opportunity to
modify their damages estimate.
We provide this extensive review of the procedural
history to make a basic point: while we appreciate the District
Court‘s attempt to conserve judicial resources and refrain
from addressing the damages issue unless absolutely
necessary, it is apparent from the record that Plaintiffs‘
request for permission to submit alternative damages
calculations was given little more than nominal consideration.
We are mindful that the District Court has considerable
discretion in matters regarding expert discovery and case
management, and a party challenging the district court‘s
conduct of discovery procedures bears a ―heavy burden.‖ In
re Fine Paper, 685 F.2d at 817-18 (―We will not interfere
80
with a trial court‘s control of its docket ‗except upon the
clearest showing that the procedures have resulted in actual
and substantial prejudice to the complaining litigant.‘‖)
(citation omitted); see Schiff, 602 F.3d at 176. Under Federal
Rule of Civil Procedure 26(a)(2), a party is required to
disclose an expert report containing ―a complete statement of
all opinions the witness will express and the basis and reasons
for them.‖ Fed. R. Civ. P. 26(a)(2)(B)(i) (emphasis added).
Any additions or changes to the information in the expert
report must be disclosed by the time the party‘s pretrial
disclosures are due. Fed. R. Civ. P. 26(e)(2). Here, Plaintiffs
were required to make all mandatory disclosures six months
before trial, including all damages calculations. The damages
estimates in DeRamus‘s report were found to be unreliable,
and Plaintiffs sought, after the date by which discovery
disclosures were due, to modify the estimates to reflect
reliance on different data. Ordinarily, we will not disrupt a
district court‘s decision to deny a party‘s motion to add
information to an expert report under such circumstances.
Schiff, 602 F.3d at 176; In re Fine Paper, 685 F.3d at 817. A
plaintiff omits evidence necessary to sustain a damages award
at its own risk. See Natural Res. Def. Council, Inc. v. Texaco
Ref. & Mktg., Inc., 2 F.3d 493, 504 (3d Cir. 1993).
However, exclusion of critical evidence is an
―extreme‖ sanction, and thus, a district court‘s discretion is
not unlimited. Konstantopoulos v. Westvaco Corp., 112 F.3d
710, 719 (3d Cir. 1997); see also E.E.O.C. v. Gen. Dynamics
Corp., 999 F.2d 113, 116 (5th Cir. 1993) (explaining that a
continuance, as opposed to exclusion, is the ―preferred
means‖ of dealing with a party‘s attempt to offer new
81
evidence after the time for discovery has closed). There are
indeed times, even when control of discovery is at issue, that
a district court will ―exceed[] the permissible bounds of its
broad discretion.‖ Drippe v. Tobelinski, 604 F.3d 778, 783
(3d Cir. 2010). In Meyers v. Pennypack Woods Home
Ownership Ass’n, 559 F.2d 894, 905 (3d Cir. 1977),
overruled on other grounds by Goodman v. Lukens Steel Co.,
777 F.2d 113 (3d Cir. 1985), we set forth five factors that
should be considered in deciding whether a district court‘s
exclusion of evidence as a discovery sanction constitutes an
abuse of discretion. Here, although the District Court‘s
decision was not a discovery sanction nor an exclusion of
proffered evidence, but rather an exercise of discretion to
control the discovery process and a refusal to allow
submission of additional evidence, we find the Pennypack
factors instructive, and thus they will guide our inquiry. See
Trilogy Commc’ns, Inc. v. Times Fiber Commc’ns, Inc., 109
F.3d 739, 744-45 (Fed. Cir. 1997) (applying factors similar to
those set forth in Pennypack to evaluate whether a district
court erred in denying the plaintiff‘s motion to supplement its
expert report with additional data); see also Hunt v. Cnty. of
Orange, 672 F.3d 606, 616 (9th Cir. 2012) (applying similar
factors to determine whether the district court abused its
discretion in denying a motion to amend a pretrial order).
In considering whether the District Court abused its
discretion in denying Plaintiffs‘ request to submit alternate
damages calculations, we will consider: (1) ―the prejudice or
surprise in fact of the party against whom the excluded
witnesses would have testified‖ or the excluded evidence
would have been offered; (2) ―the ability of that party to cure
82
the prejudice‖; (3) the extent to which allowing such
witnesses or evidence would ―disrupt the orderly and efficient
trial of the case or of other cases in the court‖; (4) any ―bad
faith or willfulness in failing to comply with the court‘s
order‖; and (5) the importance of the excluded evidence.
Pennypack, 559 F.2d at 904-05. The importance of the
evidence is often the most significant factor. See Sowell v.
Butcher & Singer, Inc., 926 F.2d 289, 302 (3d Cir. 1991);
Pennypack, 559 F.2d at 904 (observing ―how important [the
excluded] testimony might have been and how critical [wa]s
its absence‖).
Applying the Pennypack factors to this case, we
conclude that the District Court abused its discretion in
denying Plaintiffs‘ request to allow DeRamus to submit his
alternate damages estimates. As to the first and second
factors, Eaton would not have suffered substantial prejudice if
DeRamus were allowed to amend his expert report.
DeRamus‘s new calculations will be based on data from the
initial report, which Eaton has been aware of for nearly three
years, and DeRamus will employ methodologies that the
District Court has already recognized as being regularly and
reliably applied by economists. As Plaintiffs noted in their
motion for clarification, it would be ―a straightforward matter
of arithmetic‖ to substitute data from the econometric model
and actual sales data for the SBP projections. For this reason,
the District Court‘s concern that granting Plaintiffs‘ request
would be ―tantamount to reopening discovery‖ seems
unfounded. Although Eaton will have to respond to new
calculations, it will not have to analyze any new data, or
challenge any new methodologies. Moreover, Plaintiffs
83
specifically set forth in their motion for clarification the
changes that DeRamus would make, and because the changes
only involved the substitution of inputs, Eaton would not be
unfairly surprised by the new damages estimates.
As to the third Pennypack factor, allowing DeRamus
to submit additional damages calculations will not disrupt the
orderly and efficient flow of the case. In fact, our ruling on
the liability issues and remand to the District Court to resolve
damages is precisely what the District Court and the parties
envisioned all along. Eaton, well aware of the District
Court‘s desire to have this Court determine the liability issues
before setting a damages trial, suggested that the best way to
accomplish the District Court‘s objective was to amend the
JMOL order to include ―zero damages and no injunctive
relief.‖ As the District Court stated at the July 25, 2011 status
conference, ―[t]he way I handle complex litigation generally,
when I bifurcate, is that I enter a final judgment pursuant to
Rule 54(b) . . . and once the Circuit Court determines liability,
if there is a reason to have a damages trial, we have a
damages trial.‖ Thus, it cannot seriously be a surprise to any
of the parties that they will once again be required to address
damages in this case. Additionally, Eaton repeatedly states in
its brief that Plaintiffs seek to reopen discovery ―on the eve of
trial.‖ Although that may have been true when Plaintiffs‘
original motion for clarification was filed, it is no longer true.
Trial ended in October 2009 and thus, when the District Court
finally ruled on Plaintiffs‘ motion, there was no longer any
time-crunch problem. Any concern that granting Plaintiffs‘
motion would prevent Eaton from being able to effectively
prepare to address DeRamus‘s new damages estimates at trial
84
is no longer relevant, nor is there any risk that granting
Plaintiffs‘ motion would excessively delay a trial on liability.
As to the fourth factor, there is no evidence of any bad
faith on the part of Plaintiffs. However, under this fourth
factor, we may also consider the Plaintiffs‘ justifications for
failing to include alternative damages calculations in the
event calculations based on the SBP were found to be
insufficient. See Pennypack, 559 F.2d at 905; Gen. Dynamics
Corp., 999 F.2d at 115-16. Given that DeRamus‘s report
already included the data necessary to develop alternate
damages estimates, he could very easily have provided such
estimates. Plaintiffs have provided no persuasive explanation
for his failure to do so, other than that he believed his existing
estimates were sufficiently reliable. It is not the district
court‘s responsibility to help a party correct an error or a poor
exercise of judgment, and thus, Plaintiffs‘ conscious choice to
rely so heavily on data that was ultimately found to be
unreliable weighs against a finding of abuse of discretion.
This is especially true in a case such as this, where the party
submitting the flawed expert report is a large corporation with
significant resources represented by highly competent
counsel.
However, perhaps the most important factor in this
case is the critical nature of the evidence, and the
consequences if permission to amend is denied. Expert
testimony is necessary to establish damages in an antitrust
case. As such, without additional damages calculations, it is
clear that Plaintiffs will be unable to pursue damages, despite
the fact that they won at the liability stage. Compare Gen.
Dynamics Corp., 999 F.2d at 116-17 (finding an abuse of
85
discretion in the district court‘s exclusion of expert testimony,
in part, because the total exclusion of such testimony ―was
tantamount to a dismissal of the [plaintiff‘s] . . . claim‖), with
Sowell, 926 F.2d at 302 (finding no abuse of discretion in
district court‘s exclusion of proffered expert testimony, in
large part, because ―the record [was] totally devoid of any
indication of . . . how th[e] testimony might have bolstered
[the plaintiff‘s] case,‖ and thus, there was ―no basis whatever
for believing that the admission of expert testimony would
have influenced the outcome of th[e] case‖). The District
Court‘s decision therefore would clearly influence the
outcome of the case. See Sowell, 926 F.2d at 302.
Significantly, in the antitrust context, a damages award
not only benefits the plaintiff, it also fosters competition and
furthers the interests of the public by imposing a severe
penalty (treble damages) for violation of the antitrust laws.
See Hawaii v. Standard Oil Co. of Cal., 405 U.S. 251, 262
(1972) (―Every violation of the antitrust laws is a blow to the
free-enterprise system envisaged by Congress. . . . In
enacting these laws, Congress had many means at its disposal
to penalize violators. It could have, for example, required
violators to compensate federal, state, and local governments
for the estimated damage to their respective economies
caused by the violations. But, this remedy was not selected.
Instead, Congress chose to permit all persons to sue to
recover three times their actual damages . . . . By [so doing],
Congress encouraged these persons to serve as ‗private
attorneys general.‘‖) (citations omitted); Mitsubishi Motors
Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 655
(1985) (―A claim under the antitrust laws is not merely a
86
private matter. The Sherman Act is designed to promote the
national interest in a competitive economy . . . .‖) (quotation
omitted). Thus, if Plaintiffs are not able to pursue damages,
not only will they be unable to recover for the antitrust injury
Eaton caused, the policy of deterring antitrust violations
through the treble damages remedy will also be frustrated.
See Paoli II, 35 F.3d at 750 (―[T]he likelihood of finding an
abuse of discretion is affected by the importance of the
district court‘s decision to the outcome of the case and the
effect it will have on important rights.‖).
In sum, after weighing the Pennypack factors and
taking into account the circumstances under which Plaintiffs‘
motion for clarification was ultimately denied, we conclude
that the District Court abused its discretion in not permitting
Plaintiffs to submit alternate damages calculations.28
28
We express no opinion as to the reliability or
admissibility of DeRamus‘s alternate damages calculations.
That is a matter left to the District Court on remand.
However, we note that Plaintiffs‘ motion for clarification only
sought to include damages calculations based on data already
in the expert report, and that fact is crucial to our holding that
prejudice to Eaton can be easily cured. Nothing in our
opinion should be read as requiring the District Court to allow
Plaintiffs to bring in entirely new data for the revised
damages estimates.
87
D. Article III Standing to Seek Injunctive Relief
Finally, we turn to Eaton‘s contention that Plaintiffs
lack standing to seek injunctive relief. Eaton argues that
Plaintiffs‘ complete withdrawal from the HD transmissions
market in 2006 and their failure to present evidence showing
anything more than a mere possibility that they will reenter
the market precludes a finding of Article III standing as to
injunctive relief. Although the District Court did not directly
address standing, it noted in a footnote that, ―[w]hile
[P]laintiffs are no longer in business and are unable to
directly benefit from an injunction, here, an injunction is
appropriate because of the public‘s interest in robust
competition and the possibility that [P]laintiffs may one day
reenter the market.‖ ZF Meritor LLC v. Eaton Corp., 800 F.
Supp. 2d 633, 639 (D. Del. 2011). We agree with Eaton that
this determination was improper, and we will therefore vacate
the injunction issued by the District Court.29
29
Even though Meritor was still technically in the HD
transmissions business at the time the complaint in this case
was filed, it is still appropriate to frame this issue as one of
standing, rather than one of mootness. Plaintiffs‘ complaint,
which was filed on October 5, 2006, stated that Meritor
intended to exit the HD transmissions business in January
2007, and did not indicate any intent to reenter. Thus, even at
the time the complaint was filed, Plaintiffs could not
demonstrate the requisite likelihood of future injury sufficient
to confer standing. See Davis v. F.E.C., 554 U.S. 724, 734
(2008) (―[T]he standing inquiry [is] focused on whether the
party invoking jurisdiction had the requisite stake in the
88
A plaintiff bears the burden of establishing that he has
Article III standing for each type of relief sought. Summers v.
Earth Island Inst., 555 U.S. 488, 493 (2009). In order to have
standing to seek injunctive relief, a plaintiff must show:
(1) that he is under a threat of suffering ―‗injury in fact‘ that is
concrete and particularized; the threat must be actual and
imminent, not conjectural or hypothetical‖; (2) a causal
connection between the injury and the conduct complained
of; and (3) a likelihood that a favorable judicial decision will
prevent or redress the injury. Id. (citing Friends of Earth, Inc.
v. Laidlaw Envtl. Servs., Inc., 528 U.S. 167, 180-81 (2000)).
Even if the plaintiff has suffered a previous injury due to the
defendant‘s conduct, the equitable remedy of an injunction is
―unavailable absent a showing of irreparable injury, a
requirement that cannot be met where there is no showing of
any real or immediate threat that the plaintiff will be wronged
again[.]‖ City of Los Angeles v. Lyons, 461 U.S. 95, 111
(1983); see O’Shea v. Littleton, 414 U.S. 488, 495-96 (1974)
(―Past exposure to illegal conduct does not in itself show a
present case or controversy regarding injunctive relief . . . if
unaccompanied by any continuing, present adverse effects.‖).
Accordingly, a plaintiff may have standing to pursue
outcome when the suit was filed.‖) (citations omitted); U.S.
Parole Comm’n v. Geraghty, 445 U.S. 388, 397 (1980) (―The
requisite personal interest that must exist at the
commencement of the litigation (standing) must continue
throughout its existence (mootness).‖) (citation omitted).
Moreover, even if we treated this as a mootness question, our
conclusion would remain the same.
89
damages, but lack standing to seek injunctive relief. Lyons,
461 U.S. at 105.
For example, in City of Los Angeles v. Lyons, the
plaintiff sued the city, seeking damages, injunctive relief, and
declaratory relief, for an incident in which he was allegedly
choked by police officers. Id. at 97. The Supreme Court held
that, although the plaintiff clearly had standing to seek
damages, he lacked standing to seek injunctive relief because
he failed to establish a ―real and immediate threat‖ that he
would again be stopped by the police and choked. Id. at 105.
―Absent a sufficient likelihood that he [would] again be
wronged in a similar way, [the plaintiff] [was] no more
entitled to an injunction than any other citizen of Los
Angeles.‖ Id. at 111. Likewise, in Summers v. Earth Island
Institute, the Court held that an organization lacked standing
to enjoin the application of Forest Service regulations in
national parks where its members expressed only a ―vague
desire‖ to return to the affected parks. 555 U.S. at 496.
―Such some-day intentions—without any description of
concrete plans, or indeed any specification of when the some
day will be—do not support a finding of . . . actual or
imminent injury.‖ Id. (quoting Lujan v. Defenders of
Wildlife, 504 U.S. 555, 564 (1992)) (internal marks omitted);
see also Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541,
2559-60 (2011) (noting that employees who no longer
worked for Wal-Mart lacked standing to seek injunctive or
declaratory relief against Wal-Mart‘s employment practices).
Applying those principles to our case, we hold that
Plaintiffs lack standing to seek an injunction. They clearly
have standing to seek damages based on Eaton‘s violation of
90
the antitrust laws while ZF Meritor and Meritor were
competitors. However, the ZF Meritor joint venture
operationally dissolved in 2003, Meritor stopped
manufacturing HD transmissions in 2006, and Meritor has
expressed no concrete desire to revive the joint venture or
otherwise reenter the market. The sole evidence in the record
of Meritor‘s future intentions is found in one page of trial
testimony, in which a Meritor official stated that there had
been internal discussions at the company about the possibility
of reentry, but that no decision had been made. The official
testified that Meritor ―continue[d] to monitor the performance
of the products that are in the marketplace[,] . . . ha[d] a very
thorough understanding of how the products [we]re
working[,] . . . and [was] actively considering what [its]
alternatives might be.‖ He explained, however, that upon any
attempt to reenter, Meritor would be confronted with the
―same obstacle that caused the dissolution of the joint
venture.‖30
As the District Court acknowledged, this evidence
establishes no more than a ―possibility‖ that Meritor might
one day reenter the market. Where the District Court went
30
In a post-trial status conference, the District Court
asked Plaintiffs‘ counsel why an injunction would be
appropriate given that Plaintiffs were no longer in the
business. Plaintiffs‘ counsel could give no more concrete
information about Plaintiffs‘ plans than the witness, stating
simply that, if Eaton‘s conduct was enjoined, ―a different set
of calculations‖ would apply to Plaintiffs‘ discussions
regarding reentry into the market.
91
wrong, however, was in concluding that such a possibility is
sufficient to confer Article III standing for injunctive relief.
See McCray v. Fidelity Nat’l Ins. Co., 682 F.3d 229, 242-43
(3d Cir. 2012) (―Allegations of possible future injury are not
sufficient to satisfy Article III.‖) (internal marks and citation
omitted). Plaintiffs were required to set forth sufficient facts
to show that they were entitled to prospective relief, including
that they were ―likely to suffer future injury.‖ McNair v.
Synapse Grp. Inc., 672 F.3d 213, 223 (3d Cir. 2012) (citation
omitted) (emphasis added); see McCray, 682 F.3d at 243
(explaining that ―a threatened injury must be certainly
impending and proceed with a high degree of certainty‖)
(internal marks and citation omitted). Absent a showing that
they are likely to reenter the market and again be confronted
with Eaton‘s exclusionary practices, Plaintiffs were ―no more
entitled to an injunction‖ than any other entity that has
considered the possibility of entering the HD transmissions
market. Lyons, 461 U.S. at 111. ―Vague‖ assertions of
desire, ―without any descriptions of concrete plans,‖ are
insufficient to support a finding of actual or imminent injury.
See Summers, 555 U.S. at 496. Although Plaintiffs claim that
they might again enter the market, such a decision ―w[ould]
be their choice, and what that choice may be is a matter of
pure speculation at this point.‖ McNair, 672 F.3d at 225.
Plaintiffs seem to suggest that there is a lower
threshold for standing in antitrust cases.31 However,
31
Specifically, Plaintiffs argue that the appropriate
standard is found in Section 16 of the Clayton Act, which
provides that any person ―shall be entitled to sue for and have
92
Plaintiffs confuse the doctrines of constitutional standing and
antitrust standing. Although the doctrines often overlap in
practice, they are, in fact, distinct. Sullivan v. D.B. Invs., Inc.,
667 F.3d 273, 307 (3d Cir. 2011). Regardless of any
additional requirements applicable to a particular type of
action, a plaintiff must always demonstrate that a justiciable
case or controversy exists sufficient to invoke the jurisdiction
of the federal courts. Id. Plaintiffs‘ failure to do so here
renders any inquiry into antitrust (statutory) standing
unnecessary. See Conte Bros. Auto., Inc. v. Quaker State-
Slick 50, Inc., 165 F.3d 221, 225 (3d Cir. 1998).
We agree with the District Court that there are strong
public policy reasons for issuing an injunction in this case.
However, the fact that there may be strong public policy
reasons for enjoining Eaton‘s behavior does not mean that
Plaintiffs are the appropriate party to seek such an injunction.
Standing is a constitutional mandate, Doe v. Nat’l Bd. of Med.
Exam’rs, 199 F.3d 146, 152 (3d Cir. 1999), and the
consequences that flow from a finding of lack of standing
here, although concerning, cannot affect our analysis.32
injunctive relief . . . against threatened loss or damage by a
violation of the antitrust laws . . . when and under the same
conditions and principles as injunctive relief . . . is granted by
courts of equity.‖ 15 U.S.C. § 26.
32
Because we conclude that Plaintiffs lack standing to
pursue injunctive relief, we need not address Plaintiffs‘
argument that the District Court erred by refusing to allow
them to address the scope of injunctive relief.
93
IV. CONCLUSION
First, we hold that Plaintiffs‘ claims are not subject to
the price-cost test, and instead must be analyzed as de facto
exclusive dealing claims under the rule of reason. Second,
we conclude that Plaintiffs presented sufficient evidence to
support the jury‘s finding that Eaton engaged in
anticompetitive conduct and that Plaintiffs suffered antitrust
injury as a result. Third, we find no error in the District
Court‘s decision to admit DeRamus‘s testimony on the issue
of liability. Fourth, we hold that the District Court properly
exercised its discretion in excluding DeRamus‘s damages
testimony based on his expert report, but we conclude that the
District Court abused its discretion by preventing DeRamus
from submitting alternate damages calculations based on data
already included in his initial report. Finally, we hold that
Plaintiffs lack standing to pursue injunctive relief, and
therefore, we will vacate the injunction issued by the District
Court. We will remand to the District Court for further
proceedings consistent with this opinion.
94
Greenberg, Circuit Judge, dissenting
Notwithstanding the majority‟s thoughtful and well-
crafted opinion, I respectfully dissent as I would reverse the
District Court‟s order that it entered following its opinion
reported at ZF Meritor LLC v. Eaton Corp., 769 F. Supp. 2d 684(D. Del 2011), denying Eaton‟s motion for judgment as a matter
of law. Although the majority opinion recites in detail the
factual background of this case, I nevertheless also set forth its
factual predicate as I believe the inclusion of certain additional
facts demonstrates even more clearly than the facts the majority
sets forth why Eaton was entitled to judgment as a matter of
law.1
I. FACTS
A. The HD Transmission Market
The parties stipulated before the District Court and do not
now dispute that the relevant product market in this case is
heavy-duty (“HD”) truck transmissions and that the relevant
geographic market is the United States, Canada, and Mexico, the
so-called “NAFTA market.” On appeal, Eaton does not dispute
1
Throughout this dissent I use the same standard of review that
the majority sets forth. Thus while I am exercising plenary
review of the order denying the motion for a judgment as a
matter of law within that review I am being deferential to the
jury verdict.
1
that it possessed monopoly power in that market during the
events relevant to this case.
HD trucks include linehaul trucks, the familiar 18-
wheelers used to travel long distances on highways, and
performance trucks used on unfinished terrain or to carry heavy
loads, such as cement mixers, garbage trucks, and dump trucks.
There are three types of HD truck transmissions: manual,
automatic, and automated mechanical.
As the majority indicates, the NAFTA HD truck
transmission market functions in the following way. Original
Equipment Manufacturers (“OEMs”) construct HD trucks.
There were four OEMs during the period relevant to this
dispute: Freightliner Trucks (“Freightliner”); International Truck
and Engine Corporation (“International”); PACCAR; and Volvo
Group (“Volvo”). OEMs provide the purchasers of HD trucks
with “data books” that list HD truck component part options,
including transmissions, and thereby allow the customer to
select from various options for certain parts of the HD trucks.
The data books list one option as the “standard” offering
with which OEMs will fit the truck unless the customer selects
otherwise. Additionally, the component part listed in the data
book as the lowest-priced option is referred to as the so-called
“preferred” or “preferentially-priced” option.2 For obvious
2
“Standard” and “preferred” positioning are not the same thing.
See J.A. at 2546 (PACCAR and Eaton‟s LTA) (stating that
PACCAR will list Eaton‟s product “as Standard Equipment and
the Preferred Option,” whereas “„Standard Equipment‟ means
2
reasons, positioning as the standard or preferred component part
option in a data book can be beneficial and a form of promotion
of the parts that the component part manufacturers supply.
Evidence adduced at trial, which I explore further below, shows
that OEMs decide which component parts to list as standard or
preferred based, at least in part, on their determination of which
component part is the most advantageous option for them to
supply in terms of such factors as cost of supply pricing as to the
OEMs and the availability and performance of the product.
Consequently, the OEMs and component part manufacturers
negotiate with respect to data book positioning.
Data books, however, are not the exclusive means of
advertising HD truck transmissions or other parts nor do they
restrict the truck purchasers‟ choices. Component suppliers,
such as appellees3 and Eaton, market directly to purchasers, and
purchasers of HD trucks can and do request unpublished options
that are not listed in the data books.
B. The Parties and Market Conditions
During the 1950s, Eaton began manufacturing
transmissions for HD trucks, and eventually it developed a full
the equipment that is provided to a customer unless the customer
expressly designates another supplier‟s product” and “„Preferred
Option‟ means the lowest priced option in the Data Book for
comparable products”).
3
I refer to the plaintiffs as appellees even though they are also
appellants in these consolidated appeals.
3
product line of transmissions in a range of speeds and styles.
Prior to 1989, Eaton was the only domestic manufacturer of HD
truck transmissions. In 1989, however, Meritor entered the
market with 9- and 10-speed HD manual transmissions for
linehaul trucks. But, unlike Eaton, Meritor did not offer nor did
it develop at any point a full product line of HD truck
transmissions. Nevertheless, by 1999 Meritor had obtained
approximately 18% of the market for sales of HD truck
transmissions in North America.
In 1999, Meritor entered into a joint venture with ZF
Freidrichshafen (“ZF AG”), a large German company that
previously had not sold HD truck transmissions in North
America. The joint venture, called ZF Meritor (“ZFM”), sought
to adapt for the NAFTA market ZF AG‟s “ASTronic”
transmission, a linehaul 12-speed, 2-pedal, automated
mechanical transmission. Meritor transferred its transmission
business to ZFM, and ZFM introduced the ASTronic (renamed
the “FreedomLine” for the NAFTA market) to these new
markets around February 2001. At that time, Eaton did not have
a two-pedal automated mechanical transmission and did not
intend to release one until 2004. Appellees believe that the
FreedomLine was technically superior to other HD truck
transmissions available.
In late 1999, during the same time period that appellees
formed ZFM, there was a severe economic downturn in the
NAFTA market area that caused a sharp decline of HD truck
orders. By 2001, around the time ZFM introduced the
FreedomLine, HD truck orders had fallen by approximately
50%, with demand plummeting from more than 300,000 new
4
HD truck orders per year to roughly 150,000 orders.
C. The Long-Term Agreements
In the 1980s and 1990s, Eaton entered into supply
agreements with each of the four OEMs. These agreements set
the prices for Eaton‟s transmissions and offered volume
discounts to the OEMs, i.e., discounted prices based on the
OEMs‟ purchase of a certain quantity of transmissions.
Appellees do not allege that these agreements violated the
antitrust laws. Beginning in late 2000, however, Eaton entered
into new supply agreements with all four of the OEMs. Those
agreements, to which the parties refer as long-term agreements
(“LTAs”), are at the core of the present dispute.
Eaton‟s LTAs offered the OEMs rebates based on
market-share targets. The discounts thus provided the OEMs
with lower prices on Eaton‟s transmissions conditioned on their
purchase of a certain percentage of their transmission needs
from Eaton. Although the LTAs‟ terms varied, all of the LTAs
at issue were consistent in two respects.
First, the LTAs were not explicitly exclusive-dealing
contracts: each OEM remained free to buy parts from any other
HD transmission manufacturer, including ZFM, and none of the
LTAs conditioned Eaton‟s payment of rebates on an OEM‟s
purchase of 100% of its transmission needs from it. Second,
each LTA contained a so-called “competitiveness clause” that
permitted the OEM to exclude an Eaton product from the share
target and to terminate its LTA altogether if another
manufacturer offered transmissions of better quality or lower
5
price. Because the LTAs are at the crux of ZFM‟s claims, I
review those four contracts and the circumstances of their
formation in some detail.
1. Freightliner
As of 1998, both Eaton and Meritor had respective three-
year supply agreements with Freightliner, the largest of the
OEMs. Meritor‟s agreement provided that it would reduce the
price of its component parts if Freightliner listed Meritor‟s parts
as standard in its data book, while, as I have mentioned, Eaton‟s
agreement provided volume-discount rebates to Freightliner.
In October 2000, Freightliner notified Meritor, which by
then had evolved into ZFM with respect to its transmission
business, that Eaton had offered it 10-speed transmissions at a
price significantly lower than Meritor‟s price, Eaton was
offering certain transmissions that Meritor did not have
available, and Eaton‟s transmissions were superior to Meritor‟s
in price and technology. Pursuant to a provision in Meritor‟s
supply agreement that required Meritor to remain competitive
with respect to its products in terms of quality and technology,
Freightliner notified Meritor that it had 90 days within which to
match Eaton‟s inventory or Freightliner would delete Meritor‟s
noncompetitive products from the agreement. Though Meritor
disputed Freightliner‟s contention it did not make a counteroffer
or offer to match Eaton‟s inventory.
Soon thereafter, in November 2000, Eaton entered into a
five-year LTA with Freightliner, one of the four contracts that
appellees challenge. The LTA provided rebates ranging from
6
$200 to $700, contingent on a 92% share target for Eaton‟s
transmissions and clutches, an additional truck component that
Eaton manufactured. In 2003, Eaton and Freightliner amended
the LTA by adopting a sliding scale that entitled Freightliner to
varying lower rebates if it met lower market-share targets
beginning at 86.5% and going up to 90.5%.
In exchange for the discounted prices, the LTA required
Freightliner to list Eaton‟s transmissions as the “preferred”
option in its data book. Significantly, however, Freightliner
“reserve[d] the right to publish” the FreedomLine transmission
“through the life of the agreement at normal retail price levels.”
J.A. at 1948. The LTA also provided that in 2002 Freightliner
would publish Eaton‟s transmissions and clutches in its data
book exclusively, but the parties amended that provision in 2001
to allow Freightliner to continue to publish Eaton‟s competitors‟
products. From 2002 onwards, Freightliner did not list ZFM‟s
manual transmissions but it continued to list ZFM‟s other
transmissions from 2000 to 2004. In 2004, however,
Freightliner removed the FreedomLine from its data books
because Meritor4 had refused to pay a $1,250 rebate it had
promised to Freightliner on that product and because
Freightliner had experienced reliability issues with ZFM‟s
products. See id. at 3725 (letter from Freightliner representative
to Meritor representative (Feb. 10, 2004)) (“Freightliner is
outraged at ArvinMeritor in the handling of the FreedomLine
transmissions price changes. It is totally unacceptable that
4
As explained below, ZFM dissolved in December of 2003, and
thus Meritor was handling sales of the FreedomLine
transmission in the NAFTA market as of 2004.
7
ArvinMeritor would commit to price protection, and then seek
to renege on that commitment.”).
Under the LTA, Eaton had the right to terminate the
agreement if Freightliner did not meet its share targets. In 2002,
however, even though Freightliner did not meet the 92% share
target, Eaton did not terminate the agreement. In 2003, the
parties amended the LTA so that it would last for a total of ten
years, extending the agreement to 2010.
2. International
Eaton entered into a five-year LTA with International in
July 2000. A representative from International stated that
International entered into the LTA because it made “good
business sense,” id. at 1532, inasmuch as the LTA provided the
lowest purchase price for International and there was “greater
customer preference and brand recognition for the Eaton
product,” id. at 1528.
In return, Eaton provided a $2.5 million payment to
International, $1 million of which was payable in cash or in
cost-savings initiatives. The LTA provided sliding scale rebates
of 0.35% to 2% beginning at a market share of 80% and up to
97.5% and above. It also provided for sliding rebates based on a
market share of Eaton‟s clutches. For current truck models,
International agreed to list Eaton‟s transmission as the preferred
option, and for future models, it agreed to publish Eaton‟s
transmissions exclusively.5 Notwithstanding the latter
5
International already had listed Eaton as the standard option as
8
provision, International continued to list ZFM‟s manual
transmissions in its printed data book.
3. PACCAR
In July 2000, Eaton entered into a seven-year LTA with
PACCAR. A PACCAR representative stated that PACCAR
agreed to the market-share rebates because it “ma[d]e long term
economic sense and it ha[d] a total value as to PACCAR.” Id. at
1555. The PACCAR representative indicated that the “total
value” concept incorporated such considerations as the “lower
cost” provided by the LTAs, “providing a full product line of . . .
transmissions,” “providing product during periods of peak
demand and ensuring the product is available,” “warranty
provisions,” and “aftermarket supply.” Id. at 1555-56.
The representative indicated that PACCAR was in
discussions with ZFM regarding a supply agreement but
ultimately it declined to enter into an agreement with ZFM
because, apart from Eaton‟s more appealing offer, ZFM suffered
from negative considerations such as ZFM‟s restricted output of
its products, “massive transmission failure in the marketplace
that caused market unacceptance of their transmissions earlier,”
and ZFM‟s lack of a full product line. Id. at 1557, 1562.
Additionally, PACCAR “always [paid] . . . a higher cost [for a
ZFM product] than a comparable Eaton product, independent of
the rebate,” particularly for the FreedomLine, which, according
of 1996 because, according to an International representative,
Eaton provided the greatest value to International. See J.A. at
1533.
9
to the PACCAR representative, was “by design, a more
expensive product” because of its European origins. Id. at 1558-
59. In this regard, the representative stated that Eaton‟s rebates
were not “the only thing that made them competitive.” Id. at
1562.
Under the LTA, Eaton provided price reductions, a $1
million payment, firm pricing for seven years, and engineering
and marketing support. PACCAR also could obtain rebates
ranging from 2% to 3% in exchange for meeting 90% to 95%
market share targets in both transmissions and clutches. In
exchange, PACCAR was required to list Eaton as the standard
and preferred option in its data book. At all times PACCAR
continued to list ZFM‟s transmissions in its data book.
4. Volvo
Eaton entered into a five-year LTA with Volvo in
October 2002. A Volvo representative stated that Volvo entered
into the LTA because it represented “the best overall value for
Volvo” in terms of “price, delivery, quality manufacturing, and
logistics.” Id. at 1430. Indeed, another Volvo representative
stated that “[p]ricing was significantly better with Eaton [even]
excluding rebates.” Id. at 1295; see id. at 1293, 1296 (the same
representative estimating the savings to Volvo from the LTA
with Eaton to be about 12% to 15% excluding the rebates and
stating that Volvo‟s motivation in entering the LTA was “purely
dollars, dollars and cents”). Volvo was in discussions with ZFM
to sign a supply agreement, but ultimately it did not do so in
large part because of ZFM‟s “inability to have a complete
product offering of all transmissions.” Id. at 1431.
10
The LTA provided sliding scale rebates of 0.5% to 1.5%
originally set at 65% market share, and, as of 2004, a 70% to
78% market share. Eaton had the option of terminating the LTA
if its market share at Volvo fell below 68%. In turn, Volvo
agreed to position Eaton‟s transmissions and clutches as the
standard and preferred offering. Volvo continued to list in its
data books both ZFM‟s and Volvo‟s own transmissions that it
manufactured only for installation in its own trucks.6
D. ZFM‟s Business and Exit from the Market
As of July 2000, before Eaton signed any of the
challenged LTAs, ZFM had lost nearly 20% of its market share
in transmissions, its share declining from 16.1% to 13%.
Minutes from a ZFM Board of Directors meeting held in July
2000 reveal that ZFM‟s President, Richard Martello, identified a
number of factors that caused ZFM‟s falling market position,
including:
(i) poor product quality image, (ii) a decrease in
Ryder business, (iii) turnover in the [c]ompany‟s
sales organization, (iv) an increase in sales of
Eaton Autoshift, (v) the push towards 13-speed
transmissions, especially by Freightliner, (vi) the
multi-year fleet business lost due to competitive
6
Eaton also entered into an LTA with the OEM Mack Trucks
that same month. Volvo had acquired Mack Trucks in 2001,
and it appears that the LTAs are substantively the same.
Accordingly, I refer only to the Volvo LTA.
11
equalization cutbacks in early 1999 and (vii)
controlled distribution.
J.A. at 3235.
Some explanation will illuminate Mr. Martello‟s
observations. “Competitive equalization” payments are
incentives a component manufacturer provides directly to truck
purchasers for them to select its products from a data book.
ZFM‟s internal documents, included in the trial record,
demonstrate that “[d]uring the peak periods of production
between March 1999 and September 1999, Meritor reduced
[competitive equalization] payment[s] on deals trying to reduce
the incentive [to] „war‟ with Eaton” but Eaton “continued . . . to
buy business when Meritor declined deals.” Id. at 3028.
“Controlled distribution” refers to the practice of purposefully
limiting the quantity of a product available to the market — a
practice that ZFM identified as the cause of it losing “various
deals” due to ZFM‟s “lack of product” availability. Id. at 3030.
The reference to ZFM‟s decrease in “Ryder business” appears
to refer to the fact that ZFM lost the business of the OEM
previously known as Mack-Ryder due to ZFM‟s controlled
distribution practices. See id.
In that same meeting, Mr. Martello also observed that
there were “significant forces in favor of direct drive, fully
automated transmissions,” including:
(i) major engine changes in October 2002 due to
emissions standards changes, (ii) continued driver
shortages, (iii) continued upward pressure on fuel
12
prices, (iv) market pressure on „guaranteed cost of
operation‟ sales incentives and (v) continued
technician shortages.
Id. at 3236. Significantly, as I already have noted, the
FreedomLine was an automated mechanical transmission, not a
fully automated transmission.
Mr. Martello also noted that the industry was turning
away from the component part manufacturers‟ traditional focus
on advertising directly to truck purchasers as an incentive for
them to select their component part, so-called “pull” advertising,
to focus instead on “the creation of closer relationships with the
OEMs.” Id. Along this line, Mr. Martello observed that the
OEMs desired to have “single source, full product line
suppliers” in an effort to reduce costs. See id. Additionally, Mr.
Martello noted that OEMs were resistant to the prospect of
engineering new products, such as the FreedomLine, into their
trucks, and that, as sales of HD trucks declined, component part
manufacturers provided rapidly increasing sales incentives to the
OEMs. See id. To overcome these obstacles and increase
ZFM‟s market share, Mr. Martello “recommended that a full
line of automated products be released at every OEM and that
[ZFM] develop a full [HD] product line.” Id. at 3237.
Notwithstanding ZFM‟s awareness of the declining HD
truck market, after the 2000 meeting ZFM refused to lower its
prices despite certain OEMs‟ repeated requests that it do so.
See, e.g., id. at 3596 (letter from Chris Benner, ZFM, to Paul D.
Barkus, International (Sept. 19, 2002)) (stating ZFM‟s refusal to
lower prices despite International‟s June 2002 request that it do
13
so); id. at 1537-38 (deposition testimony of Paul D. Barkus,
International) (indicating that ZFM refused International‟s
request that ZFM lower its prices in December 2001); id. at
3953 (ZFM Board minutes) (“Board did not agree with
providing any price decreases to Volvo/Mack.”). To the
contrary, at the end of 2003, ZFM raised the price of the
FreedomLine by roughly 25%, an increase that caused
significant consternation among the OEMs. Moreover, ZFM did
not develop a full HD truck transmission product line as Mr.
Martello had recommended. Furthermore, as the majority notes,
at least two of ZFM‟s transmissions, including its flagship
transmission, the FreedomLine, experienced significant
performance problems resulting in frequent repairs, and, in 2002
and 2003, ZFM faced significant warranty claims on its products
amounting to millions of dollars in potential liability.
Notwithstanding the trouble it experienced in 2000, ZFM
experienced growth in some areas. From 2001 to 2003, the
FreedomLine transmission went from comprising 0% of the
linehaul market to 6% of the linehaul market, and between 2000
and 2003, ZFM‟s market share of linehaul HD truck
transmissions increased at three of the four OEMs. From July
2000 to October 2003, ZFM‟s share of the total HD transmission
market ranged between 8% and 14%.
In spite of its gains, ZFM believed that Eaton‟s LTAs
limited ZFM‟s potential market share to approximately 8% of
the transmission market, not the 30% that it had expected to gain
as a result of the joint venture and which it needed to achieve for
the venture to be a viable business. In December 2003, on the
basis of that calculation, ZFM was dissolved. Following ZFM‟s
14
dissolution, Meritor returned to the transmission business it had
conducted before entering into the joint venture. In 2006,
however, Meritor exited the HD truck transmission business
entirely.
E. Eaton‟s Pricing
At trial, appellees did not allege or introduce any
evidence that Eaton priced its transmissions below any measure
of cost during the relevant time period, and, on appeal, appellees
do not contend that Eaton‟s prices were below cost.
Furthermore, at all times relevant to the present dispute, Eaton‟s
average transmission prices to the OEMs were lower than
ZFM‟s average prices to the OEMs. In other words, the OEMs
paid more to purchase and supply ZFM‟s transmissions to the
truck purchasers than they paid for Eaton‟s transmissions. In
particular, ZFM priced its FreedomLine significantly above the
price of Eaton‟s transmissions.
II. ANALYSIS
Although it frames the question differently, as the
majority recognizes the central question that emerges in this
appeal is what effect, if any, does appellees‟ failure to allege,
much less prove, that Eaton engaged in below-cost pricing have
on its claims? Eaton, of course, contends that the effect is
dispositive, arguing that Supreme Court precedent requires that
courts apply the price-cost test of Brooke Group Ltd. v. Brown
& Williamson Tobacco Corp., 509 U.S. 209, 113 S.Ct. 257815
(1993), in any case in which a plaintiff challenges a defendant‟s
pricing practices.7 Appellees challenged Eaton‟s pricing
practices, namely, its market-share discounts, but because
appellees did not introduce evidence that Eaton engaged in
below-cost pricing, Eaton contends that appellees did not
establish that they suffered antirust injury nor did they show that
by adopting the LTAs Eaton violated the antitrust laws.8
7
Under the Brooke Group price-cost test, a firm must first
establish that the defendant‟s prices “are below an appropriate
measure of its . . . costs,” and second, it must show that the
defendant “had a reasonable prospect [under § 1 of the Sherman
Act], or, under § 2 of the Sherman Act, a dangerous probability,
of recouping its investment in below-cost prices.” 509 U.S. at
223-24, 113 S.Ct. at 2587-88.
8
Apart from meeting the requirements of Article III standing, an
antitrust plaintiff seeking monetary or injunctive relief must
show that it has suffered antitrust injury, i.e., an “injury of the
type that the antitrust laws were intended to prevent and that
flows from that which makes [the] defendant[‟s] acts unlawful.”
Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477,
489, 97 S.Ct. 690, 697 (1977). Although courts often conflate
the antitrust injury requirement with the determination of
whether the defendant‟s conduct violated the antitrust laws, this
approach is erroneous as the antitrust injury requirement
assumes the defendant‟s conduct was unlawful (and thus
anticompetitive) and asks whether the anticompetitive aspect of
the unlawful conduct is the cause of plaintiff‟s injury. See
Angelico v. Lehigh Valley Hosp., Inc., 184 F.3d 268, 275 n.2
16
Appellees, of course, contend that their failure to show
that Eaton engaged in below-cost pricing is entirely irrelevant to
the success or failure of their claims. Appellees claim that the
obligation to show below-cost pricing applies only where a
(3d Cir. 1999) (“The District Court erred by incorporating the
issue of anticompetitive market effect into its standing analysis,
confusing antitrust injury with an element of a claim under
section 1 of the Sherman Act . . . .”); see also Daniel v. Am. Bd.
of Emergency Med., 428 F.3d 408, 447-48 (2d Cir. 2005)
(explaining that anticompetitive effects of defendant‟s behavior
“are classic „rule of reason‟ questions, distinct from the antitrust
standing question”) (citations omitted). Because I conclude that
Eaton was entitled to judgment as a matter of law as there was
insufficient evidence for the jury‟s conclusion that Eaton
violated Sections 1 and 2 of the Sherman Act and Section 3 of
the Clayton Act, I do not address whether appellees satisfied the
antitrust injury requirement. Accord L.A.P.D., Inc. v. Gen. Elec.
Corp., 132 F.3d 402, 404 (7th Cir. 1997) (“Because LAPD
adequately alleges injury in fact and thus has standing under
Article III, however, we may bypass the antitrust-injury issue to
go straight to the merits.”); Hairston v. Pac. 10 Conference, 101
F.3d 1315, 1318 (9th Cir. 1996) (“[W]e need not decide whether
appellants have met the requirements for antitrust standing,
because they have failed to establish any violation of the
antitrust laws.”); Levine v. Cent. Fl. Med. Affiliates, Inc., 72
F.3d 1538, 1545 (11th Cir. 1996) (“We need not decide whether
Dr. Levine has met the requirements for standing as to any of his
antitrust claims, because as to each one he has failed to establish
any violation of the antitrust laws.”).
17
plaintiff brings a so-called “predatory pricing” claim.9 In this
regard, appellees contend that they were not required to show
that Eaton engaged in below-cost pricing because they did not
bring a “predatory pricing” claim. In fact, appellees explicitly
disavow any allegation that Eaton engaged in below-cost pricing
and instead contend that the LTAs, including the market-share
rebates they contained, amounted to unlawful de facto exclusive
dealing agreements.10
The majority appears to split the difference between the
parties‟ two positions. The majority concludes that the Brooke
9
A firm engages in “predatory pricing” when it cuts its prices
below an appropriate measure of cost to force competitors out of
the market or to deter potential entrants from entering the
market. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,
475 U.S. 574, 584 n.8, 106 S.Ct. 1348, 1355 n.8 (1986). “The
success of any predatory scheme depends on maintaining
monopoly power for long enough both to recoup the predator‟s
losses and to harvest some additional gain.” Id. at 589, 106
S.Ct. at 1357 (emphasis in original). Due to the inherently
speculative nature of such an undertaking, “predatory pricing
schemes are rarely tried, and even more rarely successful.” Id.10
As the leading antitrust treatise points out, “to be challenged as
unlawful exclusive dealing, . . . [a] quantity discount program
would necessarily involve prices above cost, else the program
would not be sustainable.” Phillip E. Areeda & Herbert
Hovenkamp, Fundamentals of Antitrust Law § 18.03b, at 18-70
(4th ed. 2011).
18
Group price-cost test may be dispositive in a case where a
plaintiff brings a claim challenging a defendant‟s pricing
practices11 and alleges that price itself functioned as the
exclusionary tool. I agree completely with the majority‟s
conclusion in this regard. Thereafter, however, our paths
diverge because the majority appears to conclude that where a
plaintiff brings a claim of unlawful exclusive dealing against a
defendant‟s pricing practices but does not contend that the
defendant‟s prices operated as the exclusionary tool, the price-
cost test is irrelevant and has neither dispositive nor persuasive
effect.12
As I explain further below, while I do not believe that the
Supreme Court has held that the inferior courts must impose and
give dispositive effect to the Brooke Group price-cost test in
every claim challenging a defendant‟s pricing practices, the
11
Throughout this opinion I use the term “pricing practices” to
encompass the variety of ways in which a firm may set its
prices, including but not limited to, straightforward price cuts
and conditional rebates or discounts.
12
I recognize that the majority states that Eaton‟s low prices are
not irrelevant to the extent they may help explain why the OEMs
entered the LTAs even though the LTAs allegedly included
terms that were unfavorable to the OEMs and to rebut an
argument that the agreements were inefficient but the majority
does not factor the circumstance that Eaton‟s prices were above
cost into its analysis of whether the LTAs were exclusionary and
anticompetitive, and I believe its failure to do so is error.
19
Court‟s unwavering adherence to the general principle that
above-cost pricing practices are not anticompetitive and its
justifications for that position lead me to conclude that this
principle is a cornerstone of antitrust jurisprudence that applies
regardless of whether the plaintiff focuses its claim on the price
or non-price aspects of the defendant‟s pricing program. Thus,
although the price-cost test may not bar a claim of exclusive
dealing challenging a defendant‟s above-cost pricing practices,
regardless of how a plaintiff casts its claim or the non-price
elements of the pricing practices that the plaintiff identifies as
the exclusionary conduct, where a plaintiff attacks a defendant‟s
pricing practices — and to be clear that is what the market-share
rebate programs at issue here are — the fact that defendant‟s
prices were above-cost must be a high barrier to the plaintiff‟s
success. Accordingly, I believe that we must apply the Brooke
Group price-cost test to the present case and give that test
persuasive effect in the context of our broader analysis under the
antitrust laws at issue.
Allowing appellees that opportunity, the majority
concludes that the plaintiffs adduced sufficient evidence at trial
from which a jury reasonably could infer that the LTAs
represented unlawful “de facto partial exclusive dealing.”13 In
13
I cannot utilize this phrase without making the point that where
a court permits a non-exclusive, non-mandatory supply
agreement to morph into a mandatory exclusive-dealing contract
to legitimize a plaintiff‟s claim of unlawful “de facto partial
exclusive dealing” the court follows antitrust plaintiffs down the
rabbit hole a bit too far. While “de facto partial exclusive
dealing” is a creative neologism, the phrase not only distorts the
20
doing so, the majority concludes that despite the fact that the
LTAs by their terms were not exclusive nor mandatory and
despite the fact that the prices offered under them were at all
times above-cost such that an equally-efficient competitor could
have matched them, they were de facto partial exclusive dealing
contracts because Eaton was a dominant supplier, the OEMs
could not have afforded to lose Eaton as a supplier, and thus, the
majority reasons, the OEMs were compelled to enter the LTAs
and meet their market-share targets. The majority reaches its
English language (in what other realm would one refer to a
contract as “partially exclusive”?), it takes us so far from the
text of Section 3 of the Clayton Act and the actual concept of
exclusive dealing that I shudder to think what will be labeled as
exclusive dealing next.
The majority concedes that “partial exclusive dealing is
rarely a valid antitrust theory.” Typescript at 43 (internal
quotation marks omitted). Indeed, the only thing rarer may be
what appellees actually allege here: “de facto partial exclusive
dealing.” I am not aware of any Supreme Court or court of
appeals precedent recognizing such a claim, and a Westlaw
search of the phrase reveals only one other case recognizing the
concept as a viable antitrust claim. In a sign that we truly have
come full circle, that case is a class action pending in the United
States District Court for the District of Delaware brought by
truck purchasers against Eaton, the four OEMs, and a handful of
other entities, alleging that the same LTAs at issue here violated
Sections 1 and 2 of the Sherman Act and Section 3 of the
Clayton Act. See Wallach v. Eaton Corp., 814 F. Supp. 2d 428,
442-43 (D. Del. 2011).
21
conclusion despite the absence of evidence in the record
suggesting that Eaton would have refused to supply
transmissions to the OEMs had the OEMs failed to meet the
LTAs‟ market-share targets or that Eaton at any point coerced
the OEMs into entering the LTAs or meeting the targets. For
reasons I set forth more fully below, I cannot join my colleagues
in this judicial reworking of the LTAs and the unbridled
speculation the majority‟s reasoning requires to convert the
LTAs into exclusive dealing contracts. Even analyzing
appellees‟ claims under the rule of reason and the principles
used to ascertain whether an exclusive-dealing arrangement is
lawful and employing the deferential standard of review to
which we subject jury verdicts, it is plain that the agreements
could not have been and in fact were not anticompetitive.
A. The Supreme Court‟s Treatment of Antitrust Challenges to
Pricing Practices
Beginning with Cargill, Inc. v. Monfort of Colorado, Inc.,
479 U.S. 104, 107 S.Ct. 484 (1986), the Supreme Court in a
series of cases considering antitrust challenges to pricing
practices has made clear that as a general matter above-cost
pricing practices do not threaten competition. In Cargill, the
Court considered whether Monfort, a beef-packing business, had
shown antitrust injury to the end that it had standing to challenge
the merger of two of its competitors that allegedly violated
Section 7 of the Clayton Act. See id. at 106-09, 107 S.Ct. at
487-88. Monfort presented two theories of antitrust injury: “(1)
a threat of a loss of profits stemming from the possibility that . .
. [defendant], after the merger, would lower its prices to a level
at or only slightly above its costs” and “(2) a threat of being
22
driven out of business by the possibility that . . . [defendant],
after the merger, would lower its prices to a level below its
costs.” Id. at 114, 107 S.Ct. at 491.
The Court rejected Monfort‟s first theory of injury,
stating “the antitrust laws do not require the courts to protect
small businesses from the loss of profits due to continued
competition, but only against the loss of profits from practices
forbidden by the antitrust laws.” Id. at 116, 107 S.Ct. at 492.
Because the defendant‟s above-cost “competition for increased
market share” was not “activity forbidden by the antitrust laws”
but rather constituted “vigorous competition,” Monfort could
not demonstrate antitrust injury under its first theory. Id. In this
regard, the Court noted that “[t]o hold that the antitrust laws
protect competitors from the loss of profits due to such price
competition would, in effect, render illegal any decision by a
firm to cut prices in order to increase market share.” Id. The
antitrust laws, the Court noted, “require no such perverse result”
because “[i]t is in the interest of competition to permit dominant
firms to engage in vigorous competition, including price
competition.” Id. (internal quotation marks and citation
omitted). The Court rejected Monfort‟s second claim that the
defendant would engage in below-cost, i.e. predatory pricing,
following the merger because Monfort had failed to raise and
failed to adduce adequate proof of that claim before the district
court. See id. at 118-19, 107 S.Ct. at 494.
Four years later, in Atlantic Richfield Co. v. USA
Petroleum Co., 495 U.S. 328, 110 S.Ct. 1884 (1990), the Court
reiterated that above-cost pricing practices generally are not
anticompetitive, this time in the context of Section 1 of the
23
Sherman Act. In Atlantic Richfield, USA Petroleum Company
(“USA”), an independent retail marketer of gasoline, alleged
that its competitor, Atlantic Richfield Company (“ARCO”),
which sold gasoline through its own stations and indirectly
through dealers, violated Sections 1 and 2 of the Sherman Act
through a price-fixing scheme that set gasoline prices at below-
market but above-cost levels through its offer of short-term
discounts, such as volume discounts, and the elimination of
credit-card sales to its dealers. See id. at 331-32, 110 S.Ct. at
1887-88. Only USA‟s Section 1 claim was before the Court, see
id. at 333 n.3, 110 S.Ct. at 1888 n.3, and the question presented
was whether USA had suffered an antitrust injury by virtue of
ARCO‟s Section 1 violation, see id. at 335, 110 S.Ct. at 1889.
At the time, ARCO‟s conduct was regarded as a per se violation
of Section 1. See id. (citing Albrecht v. Herald Co., 390 U.S.
145, 88 S.Ct. 869 (1968), overruled by State Oil Co. v. Khan,
522 U.S. 3, 118 S.Ct. 275 (1997)).
First, the Court rejected USA‟s claim that it automatically
satisfied the antitrust injury requirement because ARCO‟s
conduct constituted a per se violation of Section 1. 495 U.S. at
336-37, 110 S.Ct. at 1890-91. The Court then turned to USA‟s
alternative claim that even if it was not entitled to a presumption
of injury, it had suffered injury “because of the low prices
produced by the vertical restraint.” Id. at 337, 110 S.Ct. at 1891.
Rejecting this contention, the Court reasoned that “[w]hen a
firm, or even a group of firms adhering to a vertical agreement,
lowers prices but maintains them above predatory levels, the
business lost by rivals cannot be viewed as an „anticompetitive‟
consequence of the claimed violation.” Id. Such injury, the
Court concluded, “is not antitrust injury; indeed, „cutting prices
24
in order to increase business often is the very essence of
competition.‟” Id. at 338, 110 S.Ct. at 1891 (emphasis in
original) (quoting Matsushita Elec. Indus. Co., Ltd. v. Zenith
Radio Corp., 475 U.S. 574, 594, 106 S.Ct. 1348, 1359 (1986)).
USA argued alternatively that it was “inappropriate to
require a showing of predatory pricing before antitrust injury
can be established when the asserted antitrust violation is an
agreement in restraint of trade illegal under § 1 of the Sherman
Act, rather than an attempt to monopolize prohibited by § 2.”
Id. at 338, 110 S.Ct. at 1891. As the Court noted, “[p]rice fixing
violates § 1, for example, even if a single firm‟s decision to
price at the same level would not create § 2 liability” because
“the price agreement itself is illegal.” Id. at 338, 110 S.Ct. at
1891. USA contended that therefore it had “suffered antitrust
injury even if [ARCO‟s] pricing was not predatory under § 2 of
the Sherman Act.” Id. at 339, 110 S.Ct. at 1891.
In a passage that is significant in the context of the
present case, the Court also rejected that contention. It
explained:
Although a vertical, maximum-price-fixing
agreement is unlawful under § 1 of the Sherman
Act, it does not cause a competitor antitrust injury
unless it results in predatory pricing. Antitrust
injury does not arise for purposes of § 4 of the
Clayton Act, until a private party is adversely
affected by an anticompetitive aspect of the
defendant‟s conduct; in the context of pricing
practices only predatory pricing has the requisite
25
anticompetitive effect. Low prices benefit
consumers regardless of how those prices are set,
and so long as they are above predatory levels,
they do not threaten competition. Hence, they
cannot give rise to antitrust injury.
Id. at 339-40, 110 S.Ct. at 1891-92 (citations omitted and some
emphasis added).
The Court observed that it had “adhered to this principle
regardless of the type of antitrust claim involved.” Id. at 340,
110 S.Ct. at 1892 (citing Cargill, 479 U.S. at 116, 107 S.Ct. at
492; Brunswick Corp., 429 U.S. at 487, 97 S.Ct. at 696).14 The
14
As did Cargill, Brunswick Corp. involved a competitor‟s
antitrust challenge to an allegedly illegal acquisition under
Section 7 of the Clayton Act because it would have brought a
“„deep pocket‟ parent into a market of „pygmies.‟” 429 U.S. at
487, 97 S.Ct. at 697. The Court concluded that the plaintiff
could not show antitrust injury based on the losses it would
suffer from that acquisition because the aspect of the merger that
made it unlawful did not cause the plaintiff‟s losses. See id.The majority interprets the Supreme Court‟s statement it
had adhered to the principle that “in the context of pricing
practices only predatory pricing has the requisite anticompetitive
effect” “regardless of the type of antitrust claim involved” to
mean “that the price-cost test applies regardless of the statute
under which a pricing practice claim is brought, not that the
price-cost [test] applies regardless of the type of anticompetitive
conduct.” Typescript at 38 n.13. While the Supreme Court‟s
26
Court noted that although “the source of the price competition in
[Atlantic Richfield] was an agreement allegedly unlawful under
§ 1 of the Sherman Act rather than a merger in violation of § 7
of the Clayton Act . . . that difference [wa]s not salient . . .
[because] [w]hen prices are not predatory, any losses flowing
from them cannot be said to stem from an anticompetitive aspect
of the defendant‟s conduct.” 495 U.S. at 340-41, 110 S.Ct. at
1892 (emphasis in original).
statement undoubtedly makes clear that the principle that above-
cost pricing is not anticompetitive applies regardless of which
provision of the antitrust laws is at issue, I believe that the
Court‟s rather clear statement that it had adhered to this
principle “regardless of the type of antitrust claim involved”
means exactly what it says — that whether the plaintiff
challenges a defendant‟s pricing practices in the context of a
challenge to an allegedly unlawful merger or whether it does so
in the context of a claim that a defendant has entered a price-
fixing agreement a plaintiff cannot contend that the prices
resulting from those arrangements are anticompetitive unless
they are below cost. While I do not believe that the Court‟s
statement in this regard requires that the price-cost test apply
with dispositive force in every challenge to a defendant‟s pricing
practices because there may be other elements of a defendant‟s
conduct that are anticompetitive notwithstanding its above-cost
prices, the Court‟s reasoning undoubtedly lends support to my
conclusion that the price-cost test must factor into a court‟s
decision when it is asked to judge the lawfulness of such a
defendant‟s rebate program.
27
It is, of course, important to understand the significance
of Cargill and Atlantic Richfield in the context of this case.
Cargill and Atlantic Richfield involved the question of whether
the plaintiffs had suffered antitrust injury, not whether above-
cost pricing practices ever can violate Sections 1 and 2 of the
Sherman Act or Section 3 of the Clayton Act. Indeed, at the
time the Court decided Atlantic Richfield, vertical, maximum-
price-fixing schemes were regarded as per se illegal under
Section 1 of the Sherman Act, and the Court assumed in its
analysis that even the above-cost scheme at issue in Atlantic
Richfield was illegal under Section 1.
Nevertheless, though it was writing in the context of the
antitrust injury requirement for the actions, the Court in Cargill
and Atlantic Richfield forcefully rejected the notion that the
above-cost pricing practices at issue threatened competition at
all. See Atl. Richfield, 495 U.S. at 340, 110 S.Ct. at 1892 (“[S]o
long as [prices] are above predatory levels, they do not threaten
competition.”); Cargill, 479 U.S. at 116, 107 S.Ct. at 492(stating that Cargill‟s above-cost pricing practices aimed at
increasing its market share was not “activity forbidden by the
antitrust laws”) (emphasis added). Because the antitrust laws at
issue in this case require to fix liability on it that Eaton‟s
behavior present a probable threat to or actually negatively
impact competition in the relevant marketplace, these
pronouncements are important here and should bear on our
consideration of the question of whether the particular pricing
practices involved in this case are anticompetitive and thus
violate the antitrust laws.
Along this same line, other courts of appeals have looked
28
to Atlantic Richfield‟s discussion of above-cost pricing practices
not only in the context of considering whether the plaintiff has
demonstrated antitrust injury but also in considering whether a
defendant‟s conduct violates the antitrust laws. See Cascade
Health Solutions v. PeaceHealth, 515 F.3d 883, 902-03 (9th Cir.
2008) (relying on Atlantic Richfield, among other cases, to hold
that bundled discounts are not exclusionary conduct under
Section 2 of the Sherman Act unless the discounts result in
below-cost pricing); Virgin Atl. Airways Ltd. v. British Airways
PLC, 257 F.3d 256, 269 (2d Cir. 2001) (stating in the context of
a challenge to a volume-discount program that “[a]s long as low
prices remain above predatory levels, they neither threaten
competition nor give rise to antitrust injury”) (citing Atl.
Richfield, 495 U.S. at 340, 110 S.Ct. at 1892) (emphasis added);
Concord Boat Corp. v. Brunswick Corp., 207 F.3d 1039, 1060-
61 (8th Cir. 2000) (relying on Atlantic Richfield in concluding
that defendant had not violated Section 2 through its above-cost
market-share discounts). Similarly, the Supreme Court has
invoked Atlantic Richfield‟s discussion of below-cost pricing
practices in considering whether pricing practices violate the
antitrust laws.
Indeed, three years after it decided Atlantic Richfield, the
Court reemphasized this principle in concluding that below-cost
pricing was necessary to establish liability under Section 2 of the
Clayton Act in an attack on a defendant‟s pricing practices. In
Brooke Group, Liggett, a generic cigarette manufacturer, alleged
that Brown & Williamson Tobacco Corporation (“B&W”)
violated Section 2 of the Clayton Act when it offered below-cost
price-cuts and volume rebates on “orders of very substantial
size” to its wholesalers on B&W‟s generic cigarettes in an effort
29
to reverse decreasing sales of its branded cigarettes. 509 U.S. at
216-17, 113 S.Ct. at 2584. The Court stated that “whether the
claim alleges predatory pricing under § 2 of the Sherman Act or
primary-line price discrimination under the Robinson-Patman
Act, . . . , a plaintiff seeking to establish competitive injury
resulting from a rival‟s low prices must prove that the prices
complained of are below an appropriate measure of its rival‟s
costs” and “that the competitor had a reasonable prospect, or
under § 2 of the Sherman Act, a dangerous probability, of
recouping its investment in below-cost prices.” Id. at 222-24,
113 S.Ct. at 2587-88 (emphasis added). Because Liggett had
failed to provide sufficient evidence that B&W had a reasonable
prospect of recouping its allegedly predatory losses, the Court
concluded that B&W was entitled to judgment as a matter of
law. See id. at 243, 113 S.Ct. at 2598.
Importantly, in explaining the dual requirements set forth
above, the Court noted that it had “rejected elsewhere the notion
that above-cost prices that are below general market levels or
the costs of a firm‟s competitors inflict injury to competition
cognizable under the antitrust laws.” Id. at 223, 113 S.Ct. at
2588 (citing Atl. Richfield, 495 U.S. at 340, 110 S.Ct. at 1892).
In this connection, the Court reiterated Atlantic Richfield‟s
principle that “„[l]ow prices benefit consumers regardless of
how those prices are set, and so long as they are above predatory
levels, they do not threaten competition . . . regardless of the
type of antitrust claim involved.‟” Id. (quoting Atl. Richfield,
495 U.S. at 340, 110 S.Ct. at 1892). The Court observed:
As a general rule, the exclusionary effect
of prices above a relevant measure of cost either
30
reflects the lower cost structure of the alleged
predator, and so represents competition on the
merits, or is beyond the practical ability of a
judicial tribunal to control without courting
intolerable risks of chilling legitimate price-
cutting.
509 U.S. at 223, 113 S.Ct. at 2588.
The Court again rejected an attack on above-cost pricing
practices with its decision in Weyerhaeuser Co. v. Ross-
Simmons Hardwood Lumber Co., 549 U.S. 312, 320-21, 127
S.Ct. 1069, 1075 (2007). Weyerhaeuser involved the unusual
situation in which there was an allegation of “predatory
bidding,” meaning that a firm with monopoly buying power on
the supply side drives up the price of that input to levels at
which a competitor cannot compete. Id. at 320, 127 S.Ct. at
1075. Once the monopolist has caused competing buyers to exit
the market for the input, “it will seek to restrict its input
purchases below the competitive level, thus reduc[ing] the unit
price for the remaining input[s] it purchases[,]” thereby allowing
the monopolist to reap profits that will offset any losses it
suffered in bidding up the input prices. Id. at 320-21, 127 S.Ct.
at 1075-76. The issue was whether a plaintiff alleging that a
defendant engaged in such conduct was required to demonstrate
that the defendant engaged in below-cost pricing through the
alleged predatory bidding on the supply side. Due to the
theoretical and practical similarities between a claim of
predatory pricing and a claim of predatory bidding, the Court
concluded that its Brooke Group test applies to predatory
bidding claims under Section 2 just as the test applies to Section
31
2 predatory pricing claims. See id. at 325, 127 S.Ct. at 1078.
In doing so, the Court noted that in Brooke Group it had
been “particularly wary of allowing recovery for above-cost
price cutting because allowing such claims could, perversely,
„chil[l] legitimate price cutting,‟ which directly benefits
consumers.” Id. at 319, 127 S.Ct. at 1074 (quoting Brooke Grp.,
509 U.S. at 223-24, 113 S.Ct. at 2588). Accordingly, the Court
had “specifically declined to allow plaintiffs to recover for
above-cost price cutting, concluding that „discouraging a price
cut and . . . depriving consumers of the benefits of lower prices .
. . does not constitute sound antitrust policy.‟” Id., 127 S.Ct. at
1074-75 (quoting Brooke Grp., 509 U.S. at 224, 113 S.Ct. at
2588).
Most recently in Pacific Bell Telephone Co. v. Linkline
Communications, Inc., 555 U.S. 438, 129 S.Ct. 1109 (2009), the
Court extended this principle to “price squeeze” claims. Price
squeeze claims allege that a “vertically integrated firm [that]
sells inputs at wholesale and also sells finished goods or services
at retail” has “simultaneously raise[d] the wholesale price of
inputs and cut the retail price of the finished good” thereby
“squeezing the profit margins of any competitors in the retail
market,” and forcing the competitors to “pay more for the inputs
they need . . . [and] cut their retail prices to match the other
firm‟s prices.” Id. at 442, 129 S.Ct. at 1114. The Court noted
that “[t]o avoid chilling aggressive price competition, [it] ha[d]
carefully limited the circumstances under which plaintiffs can
state a Sherman Act claim by alleging that prices are too low.”
Id. at 451, 129 S.Ct. at 1120. It reiterated the dual requirements
of Brooke Group for predatory pricing claims, and noted, once
32
more, Atlantic Richfield‟s principle that “so long as [prices] . . .
are above predatory levels, they do not threaten competition.”
Id. (quoting Atl. Richfield, 495 U.S. at 340, 110 S.Ct. at 1892).15
The Supreme Court‟s decisions in the above cases require
that inferior courts recognize that in general above-cost pricing
practices are not anticompetitive and thus do not violate the
antitrust laws. Time and time again, the Court has made clear
that above-cost pricing practices generally do not threaten
competition in the marketplace. Accord Cascade Health
Solutions, 515 F.3d at 901 (observing in the context of challenge
to bundled discount program that Brooke Group and
Weyerhaeuser “strongly suggest that, in the normal case, above-
cost pricing will not be considered exclusionary conduct for
antitrust purposes”); Concord Boat, 207 F.3d at 1061 (stating in
the context of a challenge to a market-share discount program
that decisions of the Supreme Court “illustrate the general rule
that above cost discounting is not anticompetitive”); see also
Khan, 522 U.S. at 15, 118 S.Ct. at 282 (“Our interpretation of
the Sherman Act also incorporates the notion that condemnation
of practices resulting in lower prices to consumers is „especially
costly‟ because „cutting prices in order to increase business
often is the very essence of competition.”) (internal quotation
15
An equally important facet of the Court‟s decision in Linkline,
in a context quite apart from that here, was its holding that a
plaintiff may not bring a Section 2 Sherman Act price-squeeze
claim “when the defendant is under no antitrust obligation to sell
the inputs to the plaintiff in the first place.” 555 U.S. at 442,
129 S.Ct. at 1115.
33
marks and citation omitted).
As the majority notes, it is also clear that the conditional
nature of the price cuts or the fact that the prices and the
conditions were memorialized in the LTAs does not render the
precedent that I summarize above inapplicable.16 As noted, both
Atlantic Richfield and Brooke Group involved conditional
discounts of another type, namely volume rebates, and surely
inasmuch as ARCO and B&W both were sophisticated
companies that dealt in large-scale transactions, they certainly
explained these discounts and the conditions they placed on
them to the purchasers of their products whether or not they did
so in writing. In any event, the purchasers necessarily knew that
they were receiving the discounts when they were afforded
16
As noted, in the case of PACCAR‟s and International‟s
respective LTAs, Eaton provided up-front cash payments in
addition to market rebates. Although these payments were not
in the form of rebates, they cannot be distinguished from the
market-share rebates because both practices were an avenue for
Eaton ultimately to provide discounted prices to the OEMs.
Accord Race Tires Am., Inc. v. Hoosier Racing Tire Corp., 614
F.3d 57, 79 (3d Cir. 2010) (noting that tire manufacturer‟s offer
of up-front payments to race sanctioning bodies to select
manufacturer‟s tires presented no more a coercive threat than an
offer of lower prices); NicSand, Inc. v. 3M Co., 507 F.3d 442,
452 (6th Cir. 2007) (en banc) (noting that defendant‟s cash
payments to induce retailers to carry its product solely were
“nothing more than price reductions offered to the buyers”)
(internal quotation marks and citation omitted).
34
them. These cases thus make apparent that the Court‟s
reluctance to condemn above-cost pricing practices extends not
only to direct price cuts but also to conditional pricing practices
whether or not they are stated in written agreements. The
principle that above-cost pricing practices generally do not
threaten competition in the marketplace remains true whether
the plaintiff casts its claim in the verbiage of “predatory pricing”
and alleges explicitly that defendant‟s prices are too low or
whether it realizes it cannot do so because the prices were above
cost so it instead couches its challenge in the language of
exclusive dealing and attacks the agreements that offer the low
prices.
In practice, however, a defendant‟s pricing practices may
include both price and non-price elements. Further, I concur in
the majority‟s conclusion that notwithstanding the Court‟s
strong pronouncements favoring above-cost price cuts, the
Supreme Court has not held that in every case in which a
plaintiff challenges a defendant‟s pricing practices the Brooke
Group test is dispositive and the plaintiff therefore must
demonstrate that there has been below-cost pricing to succeed.
See Cascade Health Solutions, 515 F.3d at 901 (noting that “in
neither Brooke Group nor Weyerhaeuser did the Court go so far
as to hold that in every case in which a plaintiff challenges low
prices as exclusionary conduct the plaintiff must prove that
those prices were below cost”).17 But where a plaintiff contends
17
Likewise, I concur fully with the majority‟s point that a firm
may engage in anticompetitive conduct without engaging in
below-cost pricing. The antitrust laws proscribe an array of
conduct that, of course, does not require as an essential element
35
that a defendant‟s prices alone were anticompetitive, the Brooke
Group price-cost test provides the entire legal framework
necessary to evaluate that claim because the Brooke Group
price-cost test is designed to measure whether prices are
anticompetitive or not. Thus, where a plaintiff challenges a
defendant‟s pricing practices as exclusive dealing or under any
other theory of antitrust liability but in fact alleges only that the
defendant‟s prices themselves operate as the exclusionary or
anticompetitive tool, the Brooke Group test must apply and have
dispositive effect.18 My conclusions in this regard largely mirror
below-cost pricing. For example, tying arrangements, unlawful
mergers, and price-fixing agreements, to name a few, are all
practices that may violate the antitrust laws regardless of the
prices resulting from such conduct. The Supreme Court has
made clear, however, that where an antitrust plaintiff attacks a
defendant‟s pricing practices, i.e. price cuts, rebates or the like,
if those practices result in above-cost prices they generally do
not threaten competition, regardless of the source or type of
antitrust claim at issue.
18
Appellees rely heavily on LePage‟s Inc. v. 3M, 324 F.3d 141(3d Cir. 2003) (en banc), and contend that our decision in that
case precludes the possibility that the price-cost test has any
applicability outside of the predatory-pricing-claim framework.
For essentially the same reasons the majority sets forth, I, too,
believe that LePage‟s must be confined to its facts and in any
event does not bear on the present factually-distinguishable case.
LePage‟s dealt with bundled rebates, a practice which we
analogized to tying arrangements in its exclusive potential and
36
which we concluded may exclude an equally efficient but less
diversified rival even if the bundled rebates resulted in above-
cost prices. See 324 F.3d at 155 (“The principal anticompetitive
effect of bundled rebates as offered by 3M is that when offered
by a monopolist they may foreclose portions of the market to a
potential competitor who does not manufacture an equally
diverse group of products and who therefore cannot make a
comparable offer.”). Above-cost single-product market-share
discounts, however, do not present the same putative danger of
excluding an equally efficient but less diversified rival by virtue
of that rival‟s limited production alone. For this exact reason, as
I explain in further detail below, the same leading antitrust
treatise upon which LePage‟s relied to analogize bundled
rebates to tying concludes that single-product market-share
discounts are more appropriately likened to straightforward
price cuts and the Brooke Group price-cost test should control
challenges to such programs. Thus, I concur with the majority
that our reasoning in that case necessarily is limited to a single-
product producer‟s claim that it has been excluded through a
more-diversified competitor‟s bundled rebate program that
conditioned discounts on the purchase of products that the
single-product producer did not offer.
Additionally, while I believe that LePage‟s‟ bases for
distinguishing Brooke Group stood on questionable grounds
when we set them forth nine years ago, as the majority notes the
Supreme Court‟s subsequent decisions have eviscerated those
bases and counsel that we do not extend LePage‟s beyond its
original parameters. Furthermore, in concluding that LePage‟s
must be confined to its facts, I think it appropriate to point out
37
those of the majority.
Where I part from my colleagues, however, is with their
conclusion that if a plaintiff challenges a defendant‟s pricing
that there has been considerable academic criticism of our
opinion in that case. See, e.g., J. Shahar Billbary, Predatory
Bundling and the Exclusionary Standard, 67 Wash. & Lee L.
Rev. 1231, 1246 (Fall 2010) (“[T]he main problem with the
LePage‟s test is that it does not investigate whether a bundled
discount is pro-competitive. . . . [It] may in fact protect a less
efficient competitor (as LePage‟s admitted to be.”); Richard A.
Epstein, Monopoly Dominance or Level Playing Field? The
New Antitrust Paradox, 72 U. Chi. L. Rev. 49, 49, 61-72
(Winter 2005) (criticizing LePage‟s‟ reasoning and noting that
the case “shows the deleterious consequences that flow from the
aggressive condemnation of unilateral practices”). Moreover,
another court of appeals specifically has declined to follow
LePage‟s, see Cascade Health Solutions, 515 F.3d at 903. But
perhaps most significantly, the Antitrust Modernization
Commission, a statutorily-created bipartisan group tasked with
evaluating the state of antitrust law and setting forth
recommendations to Congress and the President for its
modernization, criticized LePage‟s as potentially “harm[ing]
consumer welfare,” and proposed instead that courts adopt a
three-part test modeled after Brooke Group‟s below-cost pricing
test to evaluate the lawfulness of bundled discounts. See
Antitrust Modernization Comm‟n, Report and
Recommendations 94-99 (2007) available at
http://govinfo.library.unt.edu/amc/report_recommendation/amc_
final_report.pdf.
38
practices but contends that the non-price aspects of defendant‟s
conduct, rather than the prices themselves, constituted the
anticompetitive conduct, the price-cost test is no longer relevant.
While the Supreme Court has not held that the price-cost test is
dispositive of all claims that attack a defendant‟s pricing
practices, it is undeniable that its reasoning in the above cases
establishes that courts ought to exercise a great deal of caution
before condemning above-cost pricing practices. As the
majority notes, in the precedent recited above the plaintiffs
grounded their claims in the allegation that defendant‟s prices
would cause or had caused them harm. Yet the purpose of my
summary and my quotation of that precedent in such detail is to
bear out the fact that the Court‟s holdings rejecting the
respective plaintiffs‟ challenges in those cases were grounded in
the fundamental and broader principle that above-cost pricing
practices, even those embodied in discount and rebate programs
memorialized in written agreements, generally are not
anticompetitive and it is that point that is so critical here.
I believe that it is evident that the Supreme Court‟s
reasoning with respect to above-costs pricing applies to a
plaintiff‟s challenge to a defendant‟s pricing practices even if
the plaintiff claims that the non-price aspects of the defendant‟s
practices were the actual exclusionary tactics. Regardless of
what components of Eaton‟s rebate program that appellees
identify as the anticompetitive conduct, whether it is the prices
or the conditions that Eaton attached to those prices, the
question the jury considered at the trial and that we face on
appeal is whether Eaton‟s rebate program and conduct as a
whole was procompetitive or anticompetitive. See LePage‟s
Inc. v. 3M, 324 F.3d 141, 162 (3d Cir. 2003) (en banc) (“[T]he
39
courts must look to the monopolist‟s conduct taken as a whole
rather than considering each aspect in isolation.”) (citing Cont‟l
Ore Co. v. Union Carbide & Carbon Corp., 370 U.S. 690, 699,
82 S.Ct. 1404 (1962)). Our inquiry in that regard should be an
objective one that focuses on the facts of the program and our
answer to that question should not turn on the circumstance that
appellees had enough foresight specifically not to protest
Eaton‟s prices.19
Eaton‟s prices were, of course, the crux of the rebate
program and are an inextricable element of the LTAs. Although
appellees conveniently chose to ignore Eaton‟s prices in
formulating their claims, in light of that economic reality and the
Supreme Court‟s mandate that the inferior courts tread lightly
when asked to condemn above-cost pricing practices, the nature
of those prices must bear on the question of whether Eaton‟s
rebate program as a whole was anticompetitive or not.
Accordingly, I believe that if, as here, a plaintiff attacks both the
price-based and non-priced-based elements of a defendant‟s
pricing practices, a court should apply and give persuasive effect
to the Brooke Group price-cost test such that a firm‟s above-cost
pricing practices enjoy a presumption of lawfulness regardless
of how a plaintiff crafts its claim challenging the practices. This
approach honors the Supreme Court‟s repeated admonition that
19
In this regard I note that Eaton‟s rebate program existed in the
same form, above-cost prices and all, on the day before
appellees filed their claim as on the day after they filed their
claim. The program did not undergo an ontological
transformation because appellees had enough prudence not to
challenge the price aspects of the program.
40
above-cost pricing practices are generally procompetitive and
that inferior courts must exercise caution before condemning
such practices. Furthermore, it has the added virtue of injecting
a modicum of predictability into this muddled area of antitrust
jurisprudence. This principle is critical in this case.
I recognize, however, that as is always true with respect
to any nonconclusive presumption, there may be an exception to
the presumption of lawfulness of above-cost pricing if a plaintiff
challenging a defendant‟s above-cost pricing practices
establishes that the defendant‟s conduct as a whole was
anticompetitive notwithstanding the pricing aspect of its
conduct. In this vein, I acknowledge that, as most contracts
offering large-scale quantity discounts necessarily do, the LTAs
had other provisions besides the reduced prices themselves,
namely, the conditions Eaton attached to those reduced prices,
i.e., the market-share targets and the data book placement
provisions which appellees attack as anticompetitive. Applying
and giving persuasive effect to the Brooke Group price-cost test
would not preclude appellees from arguing that the non-price
aspects of Eaton‟s conduct were anticompetitive even in the
absence of below-cost pricing. In practice then, in a case such
as this one, the Brooke Group price-cost test would operate only
as one element, though a significant one, of a court‟s and jury‟s
inquiry under the rule of reason.
In at least implicitly recognizing the dubious footing of
an antitrust mode of analysis that hinges entirely on how a
plaintiff crafts its claim, the majority states that a plaintiff may
not escape the Brooke Group price-cost test simply by
characterizing its claim as one of exclusive dealing but it does
41
allow the plaintiff to avoid application of the test as long as the
plaintiff brings an exclusive dealing claim and contends that the
non-price aspects of the agreement offering the reduced prices
operated as the exclusionary tool. The result of the majority‟s
approach is that the strong procompetitive justifications driving
the Supreme Court‟s repeated charge that inferior courts
exercise caution before condemning above-cost pricing practices
suddenly disappear so long as the plaintiff is clever enough to
claim that the non-price aspects of the defendant‟s pricing
practices, not the prices themselves, were anticompetitive. I do
not believe that this is the result the precedent requires or
prudence counsels.
I reject the notion that a plaintiff may engage in such
legalistic maneuvering in an effort to circumvent the Supreme
Court‟s charge that a court look with a skeptical eye at attacks
on above-cost pricing practices. The non-price aspects of the
LTAs which appellees challenge, namely the market-share
targets and the data book placement provisions, and indeed the
LTAs themselves would not exist without the reduced prices
that Eaton offered as an incentive for the OEMs to enter the
agreements. Conceptually severing the conditions Eaton
attached to those prices ignores the economic realities of this
case and allows a plaintiff essentially to commandeer a court‟s
analysis through artificial distinctions.20 In concluding that the
20
Of course, the majority in effect if not intent encourages an
antitrust plaintiff challenging a defendant‟s above-cost pricing
practices simply to avoid any mention of defendant‟s prices. In
light of the majority‟s approach, it would be the rare case indeed
in which a sophisticated plaintiff would bring an exclusive
42
Brooke Group price-cost test at least must have persuasive
effect in a plaintiff‟s challenge to a defendant‟s pricing practices
regardless of how a plaintiff casts its claim, I believe it
appropriate to note that although I stand alone in this case, I
nonetheless find myself in good company. The leading antitrust
treatise, on which the majority also relies,21 concludes that
single-product market-share discounts that do not require
exclusivity as a condition of the discount are pro-competitive
and thus lawful so long as they remain above-cost. Because that
treatise cogently explains why above-cost market-share
dealing claim against a defendant‟s above-cost pricing practices
and allege that price itself functioned as the exclusionary tool
for such a claim necessarily would be ill-fated under the
majority‟s approach.
21
The majority quotes from Areeda and Hovenkamp to explain
the treatise‟s perspective that a dominant firm may employ
exclusive-dealing contracts to preclude a young rival‟s
expansion. I do not doubt the truth of this statement but as I
note above the treatise takes the position that market-share
discount programs that do not condition the discount on
exclusivity, which precisely describes Eaton‟s program, are, in
fact, not exclusive dealing contracts and should not be treated as
such. Areeda and Hovenkamp suggest that where a market-
share discount program conditions the discount on exclusivity
the standards applicable to exclusive dealing should apply. See
Fundamentals of Antitrust Law, § 18.03b, at 18-65 (“A discount
conditioned on exclusivity should generally be treated as no
different than an orthodox exclusive-dealing arrangement.”).
43
discounts are generally not anticompetitive and do not constitute
unlawful exclusive dealing, I quote it at length:
[U]nilaterally imposed quantity discounts
can foreclose the opportunities of rivals when a
dealer can obtain its best discount only by dealing
exclusively with the dominant firm. For example,
discounts might be cumulated over lengthy
periods of time, such as a calendar year, when no
obvious economies result. The effect of
continuously increasing discounts varies, but they
can resemble exclusive dealing in extreme
circumstances.
Nevertheless, quantity and market share
discounts differ from exclusive dealing in
important respects. First, the buyer need not
make any ex ante commitment of long duration to
deal with only one firm; as soon as other
advantages outweigh the discount, the buyer can
switch simply by paying the nondiscounted price.
The buyers can also switch if one or more other
sellers can match the discount. As long as the
discounted price is above cost and not predatory,
it can be matched by any equally efficient rival.
Second, the similarity to exclusive dealing
is greatest when the product in question is
fungible, with buyers indifferent to all
44
characteristics except price.[22] If the product is
differentiated, the buyer may wish to purchase a
mixture from alternative sellers, notwithstanding
one seller‟s progressive discount. For example,
an appliance seller who has customer demand for
four brands of refrigerators is likely to stock all
four, even though the seller of one offers
progressive discounts for larger purchases.
The effective period over which a firm is
„locked up‟ by a cumulating discount may bear on
competitive effects, just as contract duration in
excluding dealing cases. . . . Discounts that are
aggregated over a longer period — say, over all
purchases made in one year — may be more
problematic. First, however, they cannot have an
anticompetitive effect greater than exclusive
dealing with one year contracts. Where there are
multiple buyers, numerous selling opportunities
will come up anew each year. Second, in the
great majority of cases they exclude much less
than the one-year exclusive dealing contract
because an aggressive rival can steal sales by
matching the cumulated discount, which will be
22
Of course, HD truck transmissions are not fungible products.
Indeed, this fact is an unstated premise of appellees‟ claims
because they contend essentially that the FreedomLine was far
superior to Eaton‟s transmissions and that its failure in the
marketplace can be attributed only to Eaton‟s anticompetitive
conduct.
45
the same as the dominant firm‟s cumulative
discount obligation. Even in such a case, single-
item discounts can be matched by an equally
efficient rival.
For single-item discounts, no matter how
measured or aggregated, injury to an equally
efficient rival seems implausible. It is perhaps
most plausible where there are a very small
number of buyers, entry barriers into the buying
market are very high, and buying requires the
making of long-term commitments. In that case,
aggressive discounting by the monopolist could
deprive a rival of most of its patronage. Even
here, however, we would hesitate to condemn a
firm for making an above-cost sale that could
readily be matched by an equally efficient rival.
Competitive injury is not plausible when there are
a large number of buyers, particularly when entry
barriers into the buying market are low. As the
First Circuit did in Barry Wright [Barry Wright
Corp. v. ITT Grinnell Corp., 724 F.2d 227, 232
(1st Cir. 1983) (Breyer, J.)], we would test
illegality by the ordinary rules applying to
predatory pricing and allow all above-cost single
item discounts.
Given that above-cost discounts can be
matched by equally efficient rivals,
anticompetitive effects are likely only when the
large firm can offer a larger variety of products or
46
services than the smaller firm does. The most
common scenario resembles tying.
IA Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶
768b, at 148-50 (2d ed. 2000) (emphasis added).
This discussion is set forth in the treatise‟s treatment of
market-share discounts in the context of Section 2 of the
Sherman Act. However, for the same reasons recited above,
Areeda and Hovenkamp take the identical position in the context
of Section 1 Sherman Act challenges to market-share discounts:
One approach to [market-share discounts] .
. . is to treat them as exclusive dealing contracts,
with the contract period equal to the period over
which purchases can be aggregated for purposes
of measuring the size of the discount.
...
If exclusive dealing under equivalent
structural conditions and subject to equivalent
defenses were lawful, the discount arrangement
should be lawful as well. But the competitive
impact must in fact be less because any equally
efficient rival can take the customer by bidding a
better price and even compensating the customer
for the loss of the discount from the defendant —
assuming, as we have, that the defendant‟s
program results in above-cost prices at all
discount levels. . . . For these reasons we suggest
47
that discounts attached merely to the quantity of
good purchased, and not to exclusivity itself, be
treated as lawful, and not be subjected to the laws
of exclusive dealing.
The decisions to the contrary involve
situations where the defendant aggregates the
discount across two or more related products,
while the plaintiff produces only one or a subset
of these products.
XI Areeda & Hovenkamp, Antitrust Law ¶ 1807b2, at 132-33
(citing LePage‟s, 324 F.3d 141) (emphasis added).23
The treatise‟s reasoning as set forth above is clear and
needs little further elaboration from me. While, as noted, the
law allows a plaintiff to contend that non-price aspects of a
defendant‟s pricing practices were anticompetitive under the
rule of reason notwithstanding the defendant‟s above-cost
prices, I believe that the treatise‟s extraordinarily detailed
economic rationale for concluding that the price-cost test is
appropriate in challenges to single-product market-share
discounts show that my approach is on firm footing. See also
Barry Wright Corp. v. ITT Grinnell Corp., 724 F.2d 227, 232
(1st Cir. 1988) (Breyer, J.) (Above-cost prices do not “have a
tendency to exclude or eliminate equally efficient competitors.
Moreover, a price cut that leaves prices above incremental costs
23
As I explain below, Areeda and Hovenkamp take the position
that Section 3 does not encompass non-exclusive market-share
discount programs.
48
was probably moving prices in the „right‟ direction — towards
the competitive norm.”); Herbert Hovenkamp, Discounts and
Exclusion, 2006 Utah L. Rev. 841, 844 (2006) (“One of the
factors driving the predatory pricing rule is that, as long as
prices are above the relevant measure of cost, the discounts
cannot exclude an equally efficient rival. The same is true of
single-product discounts.”).
In sum, I reiterate that Supreme Court precedent requires
that courts exercise considerable caution before condemning
above-cost pricing practices and that in a challenge to a
defendant‟s pricing practices the Brooke Group price-cost test
should apply and be given persuasive effect regardless of
whether a plaintiff identifies non-price elements of a
defendant‟s conduct that it alleges were anticompetitive.
Having discussed this critical point, I now turn to the question of
whether under the rule of reason analysis and the standards
applicable to claims of unlawful exclusive dealing appellees
demonstrated that a jury could hold that Eaton violated the
antitrust laws notwithstanding its above-cost prices.
B. Clayton Act Section 3 and Sherman Act Section 1 Claims24
24
The majority collapses appellees‟ three claims into one
analysis, and while that approach is not necessarily incorrect and
the three provisions at issue overlap substantially, I believe it
most prudent to address the claims separately as the provisions
at issue have some distinct elements that require separate
discussion.
49
Appellees contend that the LTAs were anticompetitive
exclusive dealing arrangements in violation of Section 1 of the
Sherman Act and Section 3 of the Clayton Act. They claim that
through the LTAs “Eaton engaged in de facto exclusive dealing
agreements and other conduct that denied any other supplier the
ability to compete for even 10% of the market.” Appellees‟ br.
at 43.
In considering this argument, I start with the principle
that even explicit exclusive-dealing arrangements, which
preclude a buyer from purchasing the goods of another seller,
are not per se unlawful. See Race Tires Am., Inc. v. Hoosier
Racing Tire Corp., 614 F.3d 57, 76 (3d Cir. 2010); United States
v. Dentsply Int‟l, Inc., 399 F.3d 181, 187 (3d Cir. 2005).
Indeed, “it is widely recognized that in many circumstances
exclusive dealing arrangements may be highly efficient — to
assure supply, price stability, outlets, investment, best efforts or
the like — and pose no competitive threat at all.” Races Tires,
614 F.3d at 76 (quoting E. Food Servs., Inc. v. Pontifical
Catholic Univ. Servs. Ass‟n, Inc., 357 F.3d 1, 8 (1st Cir. 2004))
In this case, I make many more citations to the record
than judges of this Court ordinarily would make in an opinion. I
do so because while deference to the jury‟s verdict requires that
we not reweigh the evidence and that we view the evidence in
the light most favorable to appellees, where, as here, the
evidence supporting that verdict falls so short of the standard
required to sustain that verdict I believe it appropriate to point
not only to the absence of evidence supporting the jury verdict
but also to the considerable undisputed evidence contradicting
that verdict.
50
(internal brackets omitted); see also Standard Oil Co. of Calif. v.
United States, 337 U.S. 293, 306-07, 69 S.Ct. 1051, 1058-59
(1949) (listing advantages of requirements contracts to both
buyers and sellers); Omega Envtl., Inc. v. Gilbarco, Inc., 127
F.3d 1157, 1162 (9th Cir. 1997) (“There are . . . well-recognized
economic benefits to exclusive dealing arrangements, including
the enhancement of interbrand competition.”) (citation omitted).
As we stated in Race Tires, “[i]t is well established that
competition among businesses to serve as an exclusive supplier
should actually be encouraged.” 614 F.3d at 83 (citation
omitted). “[C]ompetition to be an exclusive supplier may
constitute „a vital form of rivalry, and often the most powerful
one, which the antitrust laws encourage rather than suppress.‟”
Id. at 76 (quoting Menasha Corp. v. News Am. Marketing In-
Store, Inc., 354 F.3d 661, 663 (7th Cir. 2004)). Of course,
“exclusive agreements are not exempt from antitrust scrutiny.”
Race Tires, 614 F.3d at 76. “All exclusive dealing agreements
must comply with section 1 of the Sherman Act.” Barr Labs.,
Inc. v. Abbott Labs., 978 F.2d 98, 110 (3d Cir. 1992) (citing
Am. Motor Inns, Inc. v. Holiday Inns, Inc., 521 F.2d 1230, 1239
(3d Cir. 1975)). “Contracts for the sale of goods . . . must also
comply with the more rigorous standards of section 3 of the
Clayton Act.” Id.While Section 3 requires that a plaintiff demonstrate that
it is “probable that performance of the contract will foreclose
competition in a substantial share of the line of commerce
affected,” Tampa Electric Co. v. Nashville Coal Co., 365 U.S.
320, 327, 81 S.Ct. 623, 628 (1961) (emphasis added), under a
Section 1 rule-of-reason case such as this case “the plaintiff
bears the initial burden of showing that the [alleged] agreement
51
produced an adverse, anticompetitive effect within the relevant
geographic market,” Burtch v. Milberg Factors, Inc., 662 F.3d
212, 222 (3d Cir. 2011) (quotations marks and citation omitted)
(emphasis added). Accordingly, if an arrangement “do[es] not
infringe upon the stiffer standards of anti-competitiveness under
the Clayton Act, . . . [it] will also be lawful under the less
restrictive provisions of the Sherman Act.” Barr Labs., 978 F.2d
at 110 (citing Am. Motor Inns, 521 F.2d at 1250); see also CDC
Techs., Inc. v. IDEXX Labs., Inc., 186 F.3d 74, 79 (2d Cir.
1999) (“The conclusion that a contract does not violate § 3 of
the Clayton Act ordinarily implies the conclusion that the
contract does not violate the Sherman Act . . . .”) (citation
omitted); Twin City Sportservice, Inc. v. Charles O. Finley &
Co., 676 F.2d 1291, 1304 n.9 (9th Cir. 1982) (“[A] greater
showing of anticompetitive effect is required to establish a
Sherman Act violation than a section 3 Clayton Act violation in
exclusive-dealing cases.”) (citation omitted).25
25
In Tampa Electric, the Court indicated that if an arrangement
is lawful under Section 3 of the Clayton Act it will be lawful
under both Sections 1 and 2 of the Sherman Act. See 365 U.S.
at 335, 81 S.Ct. at 632 (“We need not discuss the respondents‟
further contention that the contract also violates § 1 and § 2 of
the Sherman Act, for if it does not fall within the broader
proscription of § 3 of the Clayton Act it follows that it is not
forbidden by those of the former.”) (citing Times-Picayune
Publ‟g Co. v. United States, 345 U.S. 594, 608-09, 73 S.Ct. 872,
880 (1953)). In Barr Laboratories, however, we disposed of the
plaintiff‟s Section 1 Sherman Act claim with its Section 3
Clayton Act claim but we addressed the plaintiff‟s Section 2
52
To determine whether it is “probable that performance of
the contract will foreclose competition in a substantial share of
the line of commerce affected” in violation of Section 3, Tampa
Electric Co., 365 U.S. at 327, 81 S.Ct. at 628, logically a
plaintiff first must establish the share of the market, expressed in
a percentage, in which the exclusive dealing arrangement
forecloses competition. As the Court of Appeals for the District
of Columbia Circuit stated in one of the more notable antitrust
cases of the recent past, “[t]hough what is „significant‟ may vary
depending upon the antitrust provision under which an exclusive
deal is challenged, it is clear that in all cases the plaintiff must
both define the relevant market and prove the degree of
foreclosure.” United States v. Microsoft Corp., 253 F.3d 34, 69
(D.C. Cir. 2001); see also Stop & Shop Supermarket Co. v. Blue
Cross & Blue Shield of R.I., 373 F.3d 57, 66 (1st Cir. 2004)
(“For the exclusive dealing contract, the first step would be [for
plaintiff] to show the extent of foreclosure resulting from the . . .
contract . . . .”); R.J. Reynolds Tobacco Co. v. Philip Morris
Inc., 199 F. Supp. 2d 362, 388 (M.D.N.C. 2002), aff‟d, 67 F.
App‟x 810 (4th Cir. 2003) (“A plaintiff makes out a prima facie
case of substantial foreclosure by demonstrating first that a
Sherman Act claim separately. See 978 F.2d at 110-12; see also
Dentsply, 399 F.3d at 197 (concluding that the district court
erred in stating that defendant had not violated Section 2 of the
Sherman Act solely because it had concluded that defendant had
not violated Section 3 of the Clayton Act) (citing LePage‟s, 324
F.3d at 157 n.10). For this reason, I subsume appellees‟ Section
1 Sherman Act claim within its Section 3 claim but I address
separately appellees‟ Section 2 Sherman Act claim.
53
significant percentage of the relevant market is foreclosed by the
provision challenged.”).
“The share of the market foreclosed is important because,
for the contract to have an adverse effect upon competition, „the
opportunities for other traders to enter into or remain in that
market must be significantly limited.‟” Microsoft Corp., 253
F.3d at 69 (quoting Tampa Elec. Co., 365 U.S. at 328, 81 S.Ct.
at 628-29); see also Jefferson Parish Hosp. Dist. No. 2 v. Hyde,
466 U.S. 2, 45, 104 S.Ct. 1551, 1576 (1984) (O‟Connor, J.,
concurring) (“Exclusive dealing is an unreasonable restraint on
trade [under Section 1 of the Sherman Act] only when a
significant fraction of buyers or sellers are frozen out of a
market by the exclusive deal.”) (citation omitted); Chuck‟s Feed
& Seed Co. v. Ralston Purina Co., 810 F.2d 1289, 1294 (4th Cir.
1987) (“[T]he courts‟ focus in evaluating exclusive dealing
arrangements should be on their effect in shutting out competing
manufacturers‟ brands from the relevant market.”); Perington
Wholesale, Inc. v. Burger King Corp., 631 F.2d 1369, 1374
(10th Cir. 1979) (“[A] complaining trader [challenging an
exclusive-dealing arrangement] must allege and prove that a
particular arrangement unreasonably restricts the opportunities
of the seller‟s competitors to market their product.”) (citation
omitted). Thus, “[f]ollowing Tampa Electric, courts considering
antitrust challenges to exclusive contracts have taken care to
identify the share of the market foreclosed.” Microsoft Corp.,
253 F.3d at 69 (citation omitted); see also E.I. du Pont de
Nemours and Co. v. Kolon Indus., Inc., 637 F.3d 435, 451 (4th
Cir. 2011) (noting that “the requirement of a significant degree
of foreclosure serves a useful screening function”) (internal
quotation marks and citation omitted).
54
Nevertheless, the antitrust laws tolerate some degree of
market foreclosure; Section 3 only condemns an agreement
where the foreclosure represents a substantial share of the
market. See Standard Fashion Co. v. Magrane Houston Co., 258
U.S. 346, 357, 42 S.Ct. 360, 362 (1922) (“That . . . [Section 3]
was not intended to reach every remote lessening of competition
is shown in the requirement that such lessening must be
substantial.”). Thus, once the plaintiff demonstrates the portion
of the market the exclusive-dealing arrangement forecloses, the
court must ask whether that level of preemption constitutes a
“substantial” share of the market. See Tampa Elec. Co., 365
U.S. at 328, 81 S.Ct. at 628 (In a Section 3 case, the Court must
consider the degree of market foreclosure and “the competition
foreclosed by the contract must be found to constitute a
substantial share of the relevant market.”). There is no fixed
percentage at which foreclosure becomes “substantial” and
courts have varied widely in the degree of foreclosure they
consider unlawful. See R.J. Reynolds Tobacco Co., 199 F.
Supp. 2d at 388 (collecting cases and noting that “[c]ourts have
condemned provisions involving foreclosure as low as 24%
while provisions involving foreclosure as high as 50% have
been upheld”) (citations omitted).
Under Tampa Electric, however, “the degree of market
foreclosure is only one of the factors involved in determining
the legality of an exclusive dealing arrangement.” Barr Labs.,
978 F.2d at 111 (citation omitted). Indeed, while a negligible
degree of foreclosure “makes dismissal easy,” a high degree of
market foreclosure does not “automatically condemn” an
exclusive-dealing arrangement. Stop & Shop Supermarket, 373
F.3d at 68. Rather, once a plaintiff identifies the degree of
55
market foreclosure, to determine whether that preemption is
“substantial,” a court considers not only the quantitative aspect
of the foreclosure but also the qualitative conditions of the
particular market, such as “the relative strength of the parties,
the proportionate volume of commerce involved in relation to
the total volume of commerce in the relevant market area,” and
the effect “preemption of that share of the market might have on
effective competition therein.” Tampa Elec. Co., 365 U.S. at
329, 81 S.Ct. at 629; see also Barr Labs., 978 F.2d at 111.
Courts employing Tampa Electric‟s market analysis also
consider the duration of the agreement, the ease of its
terminability, the height of any entry barriers, alternative outlets
competitors may employ to sell their product, and the buyer‟s
and seller‟s business justifications for the arrangement. See
Concord Boat, 207 F.3d at 1059; Omega Envtl., 127 F.3d at
1163-65; Barr Labs., 978 F.2d at 111; Barry Wright Corp, 724
F.2d at 236-37; R.J. Reynolds Tobacco Co., 199 F. Supp. 2d at
389; see also XI Areeda & Hovenkamp, Antitrust Law ¶ 1821d,
at 183-88.26
26
In substance, the Tampa Electric standard for Clayton Act
Section 3 claims differs very marginally, if at all, from the fact-
intensive rule-of-reason analysis that applies to this case under
Section 1 of the Sherman Act. Cf. Deutscher Tennis Bund v.
ATP Tour, Inc., 610 F.3d 820, 830 (3d Cir. 2010) (“The rule of
reason requires the fact-finder to weigh [] all of the
circumstances of a case in deciding whether a restrictive practice
should be prohibited as imposing an unreasonable restraint on
competition. The inquiry is whether the restraint at issue is one
that promotes competition or one that suppresses competition.”)
56
In considering whether Eaton‟s conduct violated Section
3, I note first that it is undisputed that the LTAs were not by
their terms exclusive-dealing contracts. The LTAs did not
require the OEMs to purchase any amount, much less all, of
their transmission needs from Eaton, and they did not preclude
the OEMs from purchasing transmissions from appellees or any
other manufacturer. Additionally, the LTAs did not condition
the rebates on the OEMs‟ purchase of 100% of their
transmission needs from Eaton.
In the past, we have expressed doubt as to whether an
agreement involving less than all of a customer‟s purchases even
falls within the ambit of Section 3. See Barr Labs., 978 F.2d at110 n.24 (“An agreement affecting less than all purchases does
not amount to true exclusive dealing.”) (citation omitted); see
also W. Parcel Express v. United Parcel Serv. of Am., Inc., 190
(quotation marks and citations omitted). Indeed, it appears more
often than not that in a Section 1 case courts explicitly employ
the Tampa Electric standard as the guiding framework for the
rule-of-reason analysis. See, e.g. Allied Orthopedic Appliances
Inc. v. Tyco Health Care Grp., 592 F.3d 991, 996 (9th Cir. 2010)
(“Under the antitrust rule of reason, an exclusive dealing
arrangement violates Section 1 only if its effect is to „foreclose
competition in a substantial share of the line of commerce
affected.‟”) (quoting Omega Envtl., 127 F.3d at 1162); see also
Jefferson Parish, 466 U.S. at 45, 104 S.Ct. at 1575 (O‟Connor,
J., concurring) (“Exclusive dealing arrangements are
independently subject to scrutiny under § 1 of the Sherman Act,
and are also analyzed under the Rule of Reason.”) (citing Tampa
Elec. Co., 365 U.S. at 333-35, 81 S.Ct. at 631-32).
57
F.3d 974, 976 (9th Cir. 1999) (concluding that because volume
discount contracts did “not preclude consumers from using other
delivery services, they [we]re not exclusive dealing contracts
that preclude[d] competition”); Magnus Petroleum Co., v. Skelly
Oil Co., 599 F.2d 196, 200 (7th Cir. 1979) (“Because the
agreements contained no exclusive dealing clause and did not
require plaintiffs to purchase any amounts of gasoline that even
approached their requirements, they did not violate Section 3 of
the Clayton Act.”) (citations omitted).
Indeed, Section 3 explicitly applies only to those
agreements entered into “on the condition, agreement, or
understanding that the lessee or purchaser . . . shall not use or
deal in the goods . . . of a competitor.” 15 U.S.C. § 14; see also
Standard Fashion Co., 258 U.S. at 356, 42 S.Ct. at 362 (Section
3 “deals with consequences to follow the making of the
restrictive covenant limiting the right of the purchaser to deal in
the goods of the seller only.”).27 I doubt whether a market-share
27
Section 1 of the Sherman Act, which proscribes “[e]very
contract, combination in the form of trust or otherwise, or
conspiracy, in restraint of trade or commerce,” 15 U.S.C. § 1and Section 2 of the Sherman Act, which proscribes the
monopolization or attempted monopolization of trade or
commerce, 15 U.S.C. § 2, do not contain Section 3‟s “on the
condition” language. Accordingly, the LTAs fall within the
theoretical reach of those provisions. Nevertheless, appellees‟
Section 1 and 2 claims fail because appellees did not introduce
sufficient evidence from which a jury could infer that the LTAs
were exclusive dealing contracts that foreclosed competition in
the marketplace.
58
discount program of the type here, which does not preclude the
buyer from dealing in the goods of others and does not even
condition the rebate on exclusivity, falls within the statutory
reach of that provision. See IIIA Areeda & Hovenkamp,
Antitrust Law ¶ 768, at 148 n.26 (noting that “only the Sherman
Act applies” to a claim that a market-share discount amounts to
exclusive dealing because “[w]hile § 3 of the Clayton Act, 15
U.S.C. § 14, expressly covers the seller who offers a „discount
from, or rebate upon‟ a sale in exchange for a promise not to
deal with others, that is not the same thing as a quantity or
market share discount, in which the buyer makes no promise not
to deal with others”).28
The majority bypasses this obstacle to appellees‟ success
by stating that a plaintiff‟s allegation that a contract lacking an
express exclusivity requirement nonetheless establishes an
unlawful de facto exclusive dealing program sets forth a
28
In fact, even if the LTAs had required the OEMs to purchase a
certain share but not all of their transmissions needs from Eaton,
as the majority interprets them to do, it is still unclear whether
Section 3 would have reached that agreement. See Areeda &
Hovenkamp, Fundamentals of Antitrust Law § 18.01c, at 18-17
(“Literally, a „partial‟ exclusive dealing requirement appears not
to be covered by § 3 of the Clayton Act at all. For example, if A
requires B to purchase „at least 60 percent‟ of its gasoline needs
from A, B is still free to purchase the remaining 40 percent
elsewhere. As a result, there is no condition that B not deal in
the goods of a competitor, as the statute requires. Most of the
courts take this position.”) (citations omitted).
59
cognizable antitrust claim. In doing so, the majority also
concludes that Section 3 encompasses contracts that require
partial exclusivity.
The notion of de facto exclusive dealing has its roots in
United Shoe Machinery Corp. v. United States, 258 U.S. 451,
457, 42 S.Ct. 363, 365 (1922), in which the Court held that a
contract lacking an express agreement not to use the goods of a
competitor falls within the ambit of Section 3 if “the practical
effect is to prevent such use.” As noted, the majority appears to
interpret this statement as meaning that a contract that has the
effect of causing the purchaser to buy most of its needs from one
seller falls within Section 3 because it induces near-exclusivity.
I disagree with this interpretation and believe instead that United
Shoe and its “practical effect” standard stands for the
proposition that a contract that is not facially exclusive may
nonetheless fall within the ambit of Section 3 if, in the
implementation of its terms, it induces actual exclusivity.
In United Shoe, the Court condemned as unlawful
exclusive dealing a lease that included, among other things, a
forfeiture provision to the effect that if the lessee failed to use
exclusively machinery of certain kinds made by the lessor, the
lessor had the right to cancel the lessee‟s right to use all such
machinery, a provision that the lessee would not use the
machinery on products that had not received particular
operations upon certain of other lessor‟s machines, and a clause
that required the lessee to purchase its supplies exclusively from
the lessor. See id. at 456-57, 42 S.Ct. at 365. Lessees who used
the lessor‟s competitors‟ machines in violation of the terms of
the leases “had their attention called to the forfeiture provisions
60
in the leases, which was understood, by many of the lessees, as
warnings, in the nature of threats, that unless discontinued these
covenants of the leases would be enforced.” United States v.
United Shoe Mach. Co., 264 F. 138, 145 (D.C. Mo. 1920).
These provisions, which the Court noted amounted in reality to
“tying agreements,” fell within the scope of Section 3 because
they “effectually prevent[ed] the lessee from acquiring the
machinery of a competitor of the lessor, except at the risk of
forfeiting the right to use the machines furnished by the
[lessor].” 258 U.S. at 457-58, 42 S.Ct. at 365. Thus, in practice,
the lease induced actual, total exclusivity. Subsequent cases
relying on United Shoe‟s "practical effect” formulation bear the
point out.
In International Business Machines Corp. v. United
States, 298 U.S. 131, 135, 56 S.Ct. 701, 703 (1936), the Court,
relying on United Shoe, concluded that a lease for tabulating
machines that required the lessee to use only the tabulating cards
of the lessor on its machines fell within Section 3 because in
practice it required the exclusive use of the lessor‟s cards. The
Court explained that while “the condition is not in so many
words against the use of the cards of a competitor, but is
affirmative in form, that the lessee shall use only appellant‟s
cards in the leased machines,” because “the lessee can make no
use of the cards except with the leased machines, and the
specified use of appellant‟s cards precludes the use of the cards
of any competitor, the condition operates [to prohibit the use of
the cards of a competitor] in the manner forbidden by” Section 3
of the Clayton Act. Id. (citing United Shoe, 258 U.S. at 458, 42
S.Ct. at 365); but see FTC v. Sinclair Refining Co., 261 U.S.
463, 474, 43 S.Ct. 450, 453 (1923) (distinguishing United Shoe
61
and concluding that contract that required lessee of gasoline
pumps not to use competitor‟s gasoline in lessor‟s pumps did not
fall within Section 3 because the contract did not contain a
provision “which obligate[d] the lessee not to sell the goods of
another,” and “[t]he lessee [wa]s free to buy [pumps] wherever
he cho[se]”). Similarly, in Standard Oil, the Court assumed that
Section 3 encompassed “[e]xclusive supply contracts” that the
defendant had entered with its dealers, in which the dealer
promised “to purchase from Standard all his requirements of one
or more products.”29 337 U.S. at 295-96, 69 S.Ct. at 1054.
Accordingly, while Section 3 encompasses agreements
that do not contain express exclusivity provisions but in reality
induce actual exclusivity, it does not, as the majority seems to
believe, encompass agreements that do not contain express
exclusivity provisions and do not induce actual exclusivity.30
29
In Tampa Electric, the case most often cited for the “practical
effect” standard, the Court considered a challenge to a
requirements contract and “assume[d], but d[id] not decide, that
the contract [wa]s an exclusive-dealing arrangement within the
compass of § 3.” 365 U.S. at 330, 81 S.Ct. at 629.
30
LePage‟s and Dentsply, cases on which the majority relies, are
not to the contrary. Those cases dealt not with Section 3 of the
Clayton Act but rather with Section 2 of the Sherman Act, which
does not contain the same restrictive “on the condition”
language as Section 3. Furthermore, in LePage‟s, we concluded
that 3M‟s bundled rebate agreements constituted unlawful de
facto exclusive dealing arrangements because LePage‟s
“introduced powerful evidence” that its prior customers refused
62
Here, not only did the LTAs lack any provision imposing a ban
on the OEMs‟ purchase of Eaton‟s competitors‟ products, they
did not contain a provision amounting to or having the effect of
imposing such a ban. Moreover, the evidence adduced at the
trial demonstrates that the LTAs actually did not induce de facto
total exclusivity on the part of the OEMs. As noted, from July
2000 to October 2003, ZFM‟s share of the HD transmission
market ranged between 8% and 14%. Thus, the majority, in
interpreting the scope of Section 3 to encompass an agreement
which neither explicitly forbids nor has the effect of precluding
the OEMs from purchasing Eaton‟s competitors‟ products, has
expanded the scope of Section 3 greatly beyond its intent.
Section 3 only encompasses agreements that explicitly forbid or
have the practical effect of precluding one party from using the
goods of another. Nevertheless, despite my serious misgivings
on this threshold exclusive-dealing issue, which could justify
terminating this discussion now and thus reversing the District
Court‟s denial of judgment as a matter of law as to appellees‟
Section 3 Clayton Act claim, I will assume that the LTAs fall
to meet with LePage‟s‟ sales representatives, refused to discuss
purchasing LePage‟s products for “the next three years,” and
3M offered bonus rebates to its customers upon achieving sole-
supplier status. 324 F.3d at 158. And in Dentsply, we
concluded that a provision that Dentsply imposed on its dealers
that actually prohibited the dealers from adding its competitors‟
tooth lines as part of their product offering amounted to
exclusive dealing. 399 F.3d at 193. Here, as explained below,
appellees fell woefully short of introducing evidence that the
LTAs induced anything approaching actual exclusivity.
63
within the theoretical reach of Section 3 and proceed to analyze
the LTAs under that provision. My analysis, however, does not
get very far before it becomes readily apparent that this
fundamental flaw in appellees‟ case — that the LTAs were not,
in fact, exclusive-dealing contracts — is fatal to their claim.
As noted above, under Tampa Electric a plaintiff first
must identify the degree of market foreclosure. Despite a
lengthy trial in the District Court, which has resulted in the
creation of a nine-volume joint appendix and extensive briefing
on this appeal, appellees do not identify clearly for us the precise
degree of market foreclosure attributable to the LTAs. The
majority, however, attempts to make up for appellees‟
deficiency in this regard by stating that appellees‟ expert, Dr.
David DeRamus, testified that the LTAs left only 15% of the
market remaining to Eaton‟s competitors, or stated another way,
that the LTAs foreclosed competition in 85% of the market. In
reality, however, Dr. DeRamus did not testify that the LTAs
foreclosed competition in 85% of the market. The testimony on
which the majority apparently relies for that figure deals not
with Dr. DeRamus‟ opinion as to the extent to which the LTAs
foreclosed competition in the HD truck transmission market but
rather with Dr. DeRamus‟ calculation of Eaton‟s market share
during the relevant time period in the context of his
determination as to whether Eaton had monopoly power. See
J.A. at 722 (Dr. DeRamus‟ testimony) (explaining the steps he
took to ascertain whether “Eaton has monopoly power in the[] . .
. [NAFTA HD truck transmission market”); see also J.A. at
4758, 4760 (Dr. DeRamus‟ expert report) (setting forth the data
reflecting Eaton‟s market share). I think it obvious that the
inquiry into Eaton‟s market share is a question separate and
64
apart from the LTAs‟ alleged foreclosure effect31 and that we
may not simply borrow Dr. DeRamus‟ testimony as to Eaton‟s
market share to adduce evidence of the LTAs‟ foreclosure
effect.
In point of fact, Dr. DeRamus aimed much higher with
his estimation of the LTAs‟ alleged foreclosure effect by stating
explicitly in his expert report that “Eaton‟s exclusionary
agreements with all four of the heavy-duty truck OEMs — the
only significant manufacturers of heavy-duty trucks in the
relevant geographic markets at issue in this case — foreclosed
nearly 100 percent of the North American market or markets for
HD [t]ransmissions.” J.A. at 4814 (Dr. DeRamus‟ expert
report). Dr. DeRamus arrived at this foreclosure percentage on
the basis of the market-share targets the LTAs required for the
31
See, e.g., Barry Wright Corp., 724 F.2d at 229, 237 (observing
that potential foreclosure effect of volume discount
requirements contract between manufacturer, who had 83% to
94% market share, and purchaser of mechanical snubbers was
50% where purchaser‟s snubber purchases represented 50% of
snubber market). The distinction between these two inquiries,
the question of Eaton‟s market share and the question of the
LTAs‟ alleged foreclosure effect, is particularly critical in a case
such as this one since prior to 1989 Eaton was the only HD
transmission manufacturer and thus possessed 100% market
share at a time before appellees contend that it engaged in any
alleged anticompetitive conduct.
65
OEMs to receive the rebates.32
In denying Eaton judgment as a matter of law, the
District Court took a similar view that reliance on the market-
share targets was an appropriate method to ascertain the LTAs‟
foreclosure effect, concluding that there was sufficient evidence
“that the contracts foreclosed a substantial share of the market”
not because ZFM identified a specific foreclosure percentage
but because “each OEM was required to order 80% or more of
its transmissions from” Eaton to receive the rebates. ZF
Meritor, 769 F. Supp. 2d at 692.33 While the majority‟s reliance
on Dr. DeRamus‟ testimony regarding Eaton‟s market share to
ascertain the LTAs‟ foreclosure effect is mistaken, it is clear that
the majority likewise ultimately concludes that the market-share
32
Although Dr. DeRamus did not set forth explicitly in his
expert report how he arrived at his foreclosure percentage or his
arithmetic in that regard — a shocking oversight in a case that
hinges on this very question — his testimony at trial illuminates
that he relied on the market-share targets to arrive at his
estimation of the LTAs‟ foreclosure effect, though notably he
testified as to a different foreclosure percentage than that which
he set forth in his report. See J.A. at 858 (Dr. DeRamus‟
testimony) (explaining that he arrived at his opinion of the
LTAs‟ foreclosure effect by relying on the market-share targets
and opining that one could take a “simple average” of the
market-share targets to yield a 90% foreclosure rate).
33
The District Court‟s statement in this regard was inaccurate as
Volvo‟s LTA granted it rebates beginning at a 65% market-
share target.
66
targets may serve as a measure of the LTAs‟ foreclosure effect.
For several reasons, however, the market-share targets do not
reflect the LTAs‟ foreclosure effect, and, on this point, I find
that the Court of Appeals for the Ninth Circuit‟s and the Court
of Appeals for the Eighth Circuit‟s treatment of Sherman Act
Section 1 challenges to non-exclusive market-share discount
programs are instructive.
In Allied Orthopedic Appliances Inc. v. Tyco Health Care
Group, 592 F.3d 991, 994-96 (9th Cir. 2010), a group of
hospitals and health care providers alleged, among other things,
that Tyco, a monopolist in the U.S. pulse oximetry sensor
market, unlawfully foreclosed competition in the market in
contravention of Section 1 of the Sherman Act through its offer
of market-share discounts. As here, the market-share
agreements provided discounts conditioned on the customers‟
purchase of a certain percentage of the product in issue, i.e.,
pulse oximetry sensors, from Tyco, the discount increasing with
Tyco‟s increasing market share. “The agreements did not
contractually obligate Tyco‟s customers to buy anything from
Tyco . . . and [t]he only consequence of purchasing less than the
agreed upon percentage of Tyco‟s products was loss of the
negotiated discounts.” Id. at 995.
The court of appeals concluded that the agreements did
not foreclose competition in violation of Section 1 because the
agreements did not require Tyco‟s customers to purchase
anything from Tyco and because “[a]ny customer subject to one
of Tyco‟s market-share discount agreements could choose at
anytime to forego the discount offered by Tyco and purchase
67
from a generic competitor.” Id. at 997.34 Thus, Tyco‟s
competitors “remained able to compete for Tyco‟s customers by
offering their products at better prices.” Id. at 998.
The Court of Appeals for the Eighth Circuit took a
similar view of market-share discount agreements in Concord
Boat. In that case, a group of boat builders that sold boats to
dealers alleged that Brunswick, the market leader in the
manufacture of stern drive engines, violated Section 1 through
its offer of market-share discount agreements with the builders
and dealers. The agreements offered reduced prices conditioned
on market-share targets of 60% to 80%. See 207 F.3d at 1044.35
As is true here with respect to the product in issue, none of
Brunswick‟s programs “obligated boat builders and dealers to
purchase engines from Brunswick, and none of the programs
restricted the ability of builders and dealers to purchase engines
from other engine manufacturers.” Id. at 1045.
The court employed the standards of Tampa Electric to
conclude that the plaintiffs had “failed to produce sufficient
evidence to demonstrate that Brunswick had foreclosed a
34
The court also found significant the plaintiffs‟ expert failure to
explain why “price-sensitive hospitals would adhere to Tyco‟s
market-share agreements when they could purchase less
expensive generic sensors instead.” 592 F.3d at 997.
35
The plaintiffs also alleged that Brunswick had violated Section
7 of the Clayton Act and Section 2 of the Sherman Act, but the
court likewise rejected these claims. See 207 F.3d at 1043,
1053, 1062.
68
substantial share of the . . . market through anticompetitive
conduct” and failed to show that “Brunswick‟s discount
program was in any way exclusive” in violation of Section 1.
Id. at 1059. The court reached that conclusion because the
builders were “free to walk away from the discounts at any
time,” and “Brunswick‟s discounts, because they were
significantly above cost, left ample room for new competitors . .
. to enter the engine manufacturing market and to lure customers
away by offering superior discounts.” Id.; see also Se. Mo.
Hosp. v. C.R. Bard, Inc., 642 F.3d 608, 612-13 (8th Cir. 2011)
(rejecting Sherman Sections 1 and 2 and Clayton Section 3
challenge to market-share discount program on the basis of
Concord Boat where customers “were not required to purchase
100 percent of their . . . needs from . . . [defendant] or to refrain
from purchasing from competitors” or indeed to purchase
“anything from . . . [defendant]”); Stitt Spark Plug Co. v.
Champion Spark Plug Co., 840 F.2d 1253, 1258 (5th Cir. 1988)
(affirming district court‟s directed verdict in favor of defendant
on Section 1 and Section 3 claims where plaintiff “proved no
instance in which a distributor honored an exclusive dealing
arrangement by refusing to purchase . . . [plaintiff‟s] plugs, . . .
there was no testimony that any distributor agreed to refrain
from selling competing plugs for any specific period of time, . . .
[and] [t]here was no evidence that a distributor who failed to
abide by the agreement would be subject to any sanction”).
As was true of the contracts at issue in Allied Orthopedic
and Concord Boat with respect to what are suggested to be,
wrongly in my view, mandatory purchase obligations, the LTAs
did not obligate the OEMs to purchase anything from Eaton,
much less 100% of their transmission needs, nor did they
69
preclude the OEMs from purchasing transmissions from any
other manufacturer. Rather, the agreements provided for
increasing rebates and thus lower prices based on the percentage
of an OEM‟s transmission needs that it purchased from Eaton.
In such a circumstance, the LTAs did not foreclose competition
in any share of the market because Eaton‟s competitors were
able to compete for this business as the OEMs were at liberty to
walk away from the LTAs at any time.
Indeed, this point is precisely where the Brooke Group
price-cost test comes into play. In a situation such as this one,
where the contract in terms is not exclusive and merely provides
discounted but above-cost prices conditioned upon a market-
share target, any equally efficient competitor, including ZFM, if
it was an equally efficient competitor, had an ongoing
opportunity to offer competitive discounts to capture the OEMs‟
business. If Eaton‟s discounts had resulted in prices that were
below-cost, a charge that appellees do not make, then even an
equally-efficient competitor might not have the opportunity to
compete for the business the LTAs covered and thus it could be
said that competition was foreclosed in that share of the market
notwithstanding the non-obligatory and non-exclusive nature of
the LTAs. But we do not need to address that unlikely
circumstance because Eaton‟s discounts resulted in prices that
were above-cost and thus the LTAs “left ample room” for ZFM
or new competitors to enter the market and “to lure customers
away by offering superior discounts.” Concord Boat, 207 F.3d
at 1059. As in Allied Orthopedic, “[t]he market-share discount
agreements at issue here did not foreclose . . . [Eaton‟s]
customers from competition because „a competing manufacturer
need[ed] only offer a better product or a better deal to acquire
70
their [business].‟” 592 F.3d at 997 (quoting Omega, 127 F.3d at
1164); see also Areeda & Hovenkamp, Antitrust Law ¶ 768b, at
148-50 (concluding that above-cost market-share discounts do
not exclude equally efficient rivals because “[a]s long as the
discounted price is above cost and not predatory, it can be
matched by any equally efficient rival”). Absent evidence that
notwithstanding the above-cost prices of the LTAs the non-price
aspects of the LTAs rendered them anticompetitive, we should
conclude that as a matter of law Eaton‟s LTAs were not
anticompetitive.
The majority dismisses as inapplicable the reasoning of
Allied Orthopedic and Concord Boat by stating that “this is not a
case in which the defendant‟s low price was the clear driving
force behind the customer‟s compliance with purchase targets,
and the customers were free to walk away if a competitor
offered a better price.” Typescript at 33. But the reality is to the
contrary as the testimony I have summarized establishes it is
precisely the case that Eaton‟s low prices led the OEMs to enter
the LTAs and to strive to meet the market-share targets.
Likewise, it is clearly the case that the OEMs were free to walk
away from the market-share rebates the LTAs offered at any
time. In attempting to overcome this crucial defect in appellees‟
claim and concluding that notwithstanding the LTAs‟ terms the
LTAs were in fact mandatory agreements to which the OEMs
were beholden against their will the majority sets forth two
justifications.
First, the majority downplays the possibility that ZFM
could “steal” Eaton‟s customers by offering a superior product
or lower price because that possibility did not “prove[] to be
71
realistic.” Typescript at 47. In other words, the majority
appears to assume that because ZFM did not lure away Eaton‟s
customers through offering superior products or lower prices, it
could not have done so and the reason for its inability to do so
was the LTAs. I find the majority‟s treatment of this point to be
an unpersuasive answer to the logic of Allied Orthopedic and
Concord Boat.
I hardly need make the logical point that one cannot
assume that because an event did not happen it could not have
happened. It appears that ZFM did not lure away Eaton‟s
customers. That does not mean, however, that ZFM was
incapable of doing so. It is beyond dispute and indeed a central
point to this case that ZFM did not offer lower prices than
Eaton‟s prices and ZFM did not develop a full product line as it
knew it had to do in order to compete effectively with Eaton.36
36
The majority states, without elaboration, that Eaton assured
that there would be no other supplier that could fulfill the
OEMs‟ needs or offer a lower price. I note first that it is an
undisputed fact that when Meritor entered into the joint venture
with ZF AG at a time prior to any allegation of anticompetitive
conduct by Eaton, Meritor did not offer a full product line of
HD truck transmissions. Thereafter, ZFM explicitly identified
its lack of a full product line as a barrier to its market success
and yet it did not develop a full product line. There is no
evidence that Eaton somehow prevented either Meritor or later
ZFM from developing a full product line. Furthermore, there is
no evidence in the record indicating that Eaton prevented ZFM
from offering more attractive discounts to capture Eaton‟s
business and there is no evidence that other firms tried to enter
72
In other words, ZFM did not even engage in the type of
competitive conduct that potentially could have lured away
Eaton‟s customers. Thus, we cannot say that it is not realistic to
think that if it had engaged in that competition conduct ZFM
could have been successful.37
the HD truck transmission market but were thwarted by Eaton.
37
I recognize that appellees contend that “[f]ar from offering
low prices to seek competitive advantages . . . Eaton broke the
price mechanism, so that ZFM could not compete even by
offering discounts or other incentives notwithstanding that ZFM
had a better product.” Appellees‟ br. at 44. But appellees‟
assessment of their product does not establish that the truck
purchasers — the entities that actually made the ultimate
decision as to which transmission to select for their trucks —
would make the same assessment. Indeed, some of the evidence
suggests that both OEMs and truck purchasers held the opinion
that overall Meritor‟s products were inferior to Eaton‟s, and
Meritor does not point to evidence foreclosing the possibility
that its relatively unfavorable reputation in that regard persisted
despite the emergence of ZF Meritor and thereby tainted truck
purchasers‟ view of the FreedomLine. Moreover, even if the
truck purchasers had come to the same conclusion as appellees
regarding the FreedomLine‟s technical superiority, appellees‟
complaint holds no force as the purchasers‟ were at all times
free to act on that opinion by selecting the FreedomLine for their
trucks. Nevertheless, it is clear from the record that other
factors beyond possible technical superiority, including such
considerations as price, service, and availability of the product,
73
Second, the majority attempts to overcome this absolutely
fundamental defect in appellees‟ case by concluding that
notwithstanding the fact that the LTAs were not by their terms
mandatory and the fact that Eaton‟s prices after consideration of
the rebates were at all times above-cost such that appellees, were
they equally efficient competitors, could have matched them,
there nevertheless was sufficient evidence that the LTAs
foreclosed competition in a substantial share of the HD truck
transmission market because “the targets were as effective as
mandatory purchase requirements.” Typescript at 42. In this
regard, the majority reasons that “[c]ritically, due to Eaton‟s
position as the dominant supplier no OEM could satisfy
customer demand without at least some Eaton products, and
therefore no OEM could afford to lose Eaton as a supplier.” Id.
at 43. Therefore, the majority reasons, “a jury could have
concluded that, under the circumstances, the market penetration
targets were as effective as express purchase requirements
because no risk averse business would jeopardize its relationship
could motivate a purchaser in making its decision as to the most
advantageous transmission for it to purchase. Lest this fact be
doubted I merely need to point out that consumers regularly
purchase inexpensive automobiles even though more highly-
priced automobiles might be technically better. Overall, the
point remains that if ZFM was an equally efficient competitor
the LTAs simply did not preclude it from competing with Eaton
and did not foreclose competition in any portion of the market,
and thus a jury verdict based on a contrary conclusion simply
could not survive Eaton‟s motion for judgment as a matter of
law.
74
with the largest manufacturer of transmissions in the market.”
Id. (internal quotation marks and citation omitted).
Undoubtedly, there is evidence in the record that the
OEMs required Eaton‟s products, to the end that an OEM could
not have afforded to lose Eaton as a supplier. However, there is
not a scintilla of evidence that if an OEM did not meet its LTA‟s
market-share target Eaton would have refused to supply it with
transmissions. First, as the majority notes, only the Freightliner
LTA and the Volvo LTA granted Eaton the right to terminate
the LTA altogether if the OEM did not meet its market-share
targets. Yet the fact that Eaton had the right to terminate those
LTAs if those OEMs did not meet their targets — notably, a
right that it did not exercise when Freightliner failed to achieve
the market-share target in 2002 — is no more significant than
the fact that Eaton would not have to pay the rebate if
Freightliner did not meet the target. Termination of the LTA
simply made unavailable the rebates to those OEMs; it did not,
as the majority implies, mean that Eaton no longer would
provide transmissions to those OEMs. It simply meant that
those OEMs would not receive Eaton‟s transmissions at the
discounted prices the LTAs offered.
I understand that the LTAs are supply agreements that
ensure that Eaton will meet the OEMs‟ transmission needs and
do so at a certain price and under certain conditions, and an
OEM lacking a supply agreement may be in an unfavorable
position as it would prefer a supply agreement to set the terms of
its relationship with Eaton. Nevertheless, although an OEM
with a cancelled LTA would have lacked a supply agreement
with Eaton, at least temporarily, one cannot infer from that fact
75
that Eaton would not have supplied the OEM with its
transmissions. Furthermore, the majority glosses over the fact
that PACCAR‟s and International‟s LTAs did not include a
provision granting Eaton the right to terminate the LTAs if those
OEMs did not meet their respective market-share targets.
Nevertheless, regardless of whether the LTAs granted
Eaton a right of termination, the majority‟s suggestion that the
OEMs faced losing Eaton as a supplier if they failed to meet the
market-share targets is contradicted by the market reality that
while Eaton was the largest manufacturer of transmissions in the
market there were only four OEMs that bought Eaton‟s
transmissions. Accordingly, the idea that Eaton could or would
have refused to deal with one of the OEMs in addition to being
unsupported by the record is irrational from an economic
viewpoint for if Eaton had done so it would have turned its back
on a significant purchaser of its products measured in sales
volume. The notion is completely unjustified.
Perhaps if appellees had produced evidence at the trial
that Eaton had threatened to refuse to supply transmissions to an
OEM that did not meet its market-share targets the non-
mandatory market-share targets would have taken on an air of
the mandatory threats that the majority insists they actually
were. Literally the only evidence that I can identify relating to
this contention is deposition testimony by a Volvo representative
relaying an email he had received from one of his colleagues in
which the colleague stated that Volvo needed to meet its market
share target because if it was not successful it faced “a big risk
of cancellation of the contract, price increases and shortages if
the market is difficult,” J.A. at 688, and a sentence from an
76
internal Volvo presentation in which it speculated that if Eaton
terminated its LTA it would have “[n]o delivery performance
commitment (possibly disastrous),” id. at 2101. While I
understand that we view a jury‟s verdict through a deferential
lens, even under that standard I cannot conclude that one
sentence of second-hand speculation from a contracting party
but not from Eaton as to whether Eaton might provide an OEM
with an insufficient volume of transmissions in the event of a
market shortage and an unidentified Volvo representative‟s
statement that if it did not have a delivery performance
commitment from Eaton it could be potentially disastrous is
sufficient to sustain the inference that facially voluntary market-
share targets were in reality the mandatory, almost extortionary,
provisions the majority makes them out to be.38
I must address also an aspect of the majority‟s reasoning
on this point that I find to suffer from a serious flaw with
dangerous implications for antitrust jurisprudence. Perhaps the
majority does not believe that any evidence was required to
rebut the reality that even though the market-share targets were
38
The majority appears to hang its hat to some extent on the
notion that even if the OEMs did not actually face the threat of
losing Eaton as a supplier they believed they might and that
belief drove their compliance with the LTAs. While, as noted,
there is scant evidence, indeed, for the proposition that the
OEMs‟ efforts to meet the market-share targets was driven by
such a belief, that belief, if unfounded as it was here, does not
support the majority‟s repeated statements to the effect that
Eaton actually coerced the OEMs into entering the LTAs and
meeting the targets.
77
facially voluntary, the mere circumstances that Eaton was the
dominant supplier in the market and that no OEM could afford
to lose it as a supplier sufficed to render the LTAs mandatory.
The majority‟s reasoning in this regard literally would mean that
had Eaton not been the dominant supplier of HD truck
transmissions in the NAFTA market, there would not have been
sufficient evidence for the jury to conclude that the LTAs were
de facto exclusive. While I realize that monopolists may face
more constraints on their conduct under the antitrust laws than
less dominant firms, see LePage‟s, 324 F.3d at 151-52, it is an
unfair and unwarranted leap to create the specter of coercion out
of reference to Eaton‟s market dominance, cf. R.J. Reynolds,
199 F. Supp. 2d at 392 (“The strong position of Marlboro,
however, does not, standing alone „coerce‟ retailers into signing
. . . [market-share] agreements.”). In sum, I cannot ascribe to
the view that a non-mandatory, non-exclusive contract is
transformed magically into a mandatory, exclusive contract by
virtue of reference to the firm‟s market position alone such that
dominant firms must be wary when they enter voluntary
contracts that offer rebates or discounts lest a court later permit
a jury to interpret those contracts as mandatory simply due to
that firm‟s dominant position.
Apart from insinuating that Eaton‟s dominant market
position coerced the OEMs into meeting the market-share
targets, the majority adds to the picture of coercion it attempts to
paint by stating that “there was evidence that Eaton leveraged its
position as a supplier of necessary products to coerce the OEMs
into entering into the LTAs.” Typescript at 48. Relatedly, the
majority states that appellees “presented testimony from OEM
officials that many of the terms of the LTAs were unfavorable to
78
the OEMs and their customers, but that the OEMs agreed to
such terms because without Eaton‟s transmissions, the OEMs
would be unable to satisfy customer demand.” Id.In point of fact, there is not a trace of evidence beyond
appellees‟ own baseless accusations and the majority does not
bring our attention to any such evidence supporting its rather
serious accusation that Eaton leveraged its position as a
monopolist to force the OEMs to enter into agreements that the
OEMs did not want to enter.39 Eaton‟s offer of lower prices to
39
Appellees contend that the OEMs did not want to enter the
LTAs and did so only in response to Eaton‟s coercion by citing
to testimony that in fact weakens their case. In this regard,
appellees rely on a Volvo representative‟s testimony that it
entered into the LTA with Eaton because ZFM did not have a
full product line and thus Volvo would require Eaton‟s products
even if it entered into an LTA with ZFM but if Eaton was not its
standard partner it would not provide favorable pricing to
Volvo. See J.A. at 522; see also J.A. 2098 (noting that Eaton
would not provide favorable pricing to Volvo if it selected ZFM
as its partner). In part for this reason, it elected to enter the LTA
with Eaton.
In business as in life we rarely are presented with a
perfect option. The fact that long-term supply agreements with
ZFM and Eaton each had their respective advantages and
disadvantages is hardly surprising and that Eaton would not
have granted an OEM the generous discounts its LTA provided
if it selected ZFM as its primary supplier is likewise not exactly
an astonishing revelation. That the OEMs had to weigh these
79
the OEMs in the form of rebates and direct payments in an effort
to gain their business is hardly coercion. Rather, it is nothing
more than legitimate good business practice. See Race Tires,
614 F.3d at 79 (“[I]t is no more an act of coercion, collusion, or
improper interference for [suppliers] . . . to offer more money to
[customers] . . . than it is for such suppliers to offer the lowest . .
. prices.”).
Likewise, there is no evidence that the LTAs represented
unfavorable arrangements for the OEMs such that the OEMs
only agreed to enter the contracts out of fear of losing Eaton as a
supplier.40 Indeed, to the extent one may be tempted to infer
factors in deciding whether to enter into an LTA with Eaton
hardly amounts to coercion.
40
In their brief, appellees point to the testimony of two OEM
representatives who testified to the hardly surprising fact that
they would have preferred upfront price cuts with no strings
attached as opposed to conditional market-share targets but that
the OEMs entered the agreements because they nonetheless
offered the best prices. See J.A. at 415-16 (deposition testimony
of International representative) (stating that International
preferred to have upfront discounts “in price” but “if a supplier
is willing to offer [it] rebates” it would take that option if it
believed it could meet the conditions for those rebates); see id.
at 525 (deposition testimony of Volvo representative) (stating
that during LTA negotiations Volvo “wanted no” market-share
targets but it agreed to the 68% target because it believed it
could achieve that target and it “wanted the savings and the
equalization, and the rebates”). That the OEMs would have
80
that the market-share targets were so high as to be unfavorable
to the OEMs I note that the targets were actually very close to or
in fact below Eaton‟s preexisting market share at three out of the
four OEMs measured at a time before the adoption of the LTAs
during which appellees do not claim that Eaton was violating
any law. See J.A. at 4779 (Dr. DeRamus‟ expert report)
(Eaton‟s LTA with International began providing rebates at 80%
market share but Eaton‟s market share of International‟s
transmission needs prior to the LTA already was 79%); id. at
4785 (Eaton‟s LTA with PACCAR provided rebates beginning
at 90% but Eaton‟s market share “consistently hover[ed] around
90% or higher for HD transmissions” with PACCAR prior to the
LTA); id. at 4793 (Eaton‟s LTA with Volvo provided a rebate
starting at 65% market share but Eaton‟s market share of
Volvo‟s transmissions was 85% when they entered the LTA in
2002.). The reality that the market share levels that Eaton
reached prior to the adoption of the LTAs makes it, in a word I
do not like using but fits perfectly here, ridiculous to conclude
that the LTAs had a coercive effect on the OEMs.
preferred that Eaton simply cut its prices is hardly surprising.
Customers faced with a buy one at full price and get one for
50% off deal likely would prefer to have the option of buying
one item for 50% off. Yet, in the same way that the customer
who purchases the two items to receive the discount on one
cannot be said to have been “coerced” into that transaction, the
OEMs‟ preference for unconditional price cuts hardly can be
used as evidence that the terms of the LTAs were “unfavorable”
to them, much less so “unfavorable” as to warrant the inference
that the OEMs must have entered them as a product of coercion.
81
After studying the majority‟s treatment of the LTAs I am
left with the impression that it pictures Eaton representatives as
using coercion when they handed the OEM representatives the
LTAs. Yet the reality is that there is absolutely no evidence in
the record suggesting that Eaton compelled the OEMs by the
threat of punishment to agree to the LTAs or compelled them to
meet the share targets.41 Quite to the contrary, the record is
replete with evidence, as I have summarized above, that shows
that far from cowering under Eaton‟s “threats,” the OEMs
entered into the LTAs in furtherance of their own economic self-
interests and because those agreements provided the best
possible prices and assurance of a full product line supply. They
worked to meet the market-share targets because by achieving
those targets they received discounted prices.
Tellingly, the evidence also shows that the OEMs used
those arrangements to their advantage. An illuminating example
of this market reality is found in a letter an International
representative wrote to ZFM in June 2002, in which the
representative recounted the HD truck market‟s dramatic slump
and stated to ZFM that:
In the last 12 months, your competition has
supported our need for cost control with price
41
Of course, the lack of coercion associated with the LTAs is
significant. While coercion is not “an essential element of every
antitrust claim,” it is an important consideration where the
relevant market players adopt their own business practices and
the parties “freely entered into exclusive contracts.” Race Tires,
614 F.3d at 78.
82
reductions consistent with the trend in new truck
pricing. In addition, one of your competitors [i.e.,
Eaton] has offered International a compelling
incentive to increase their sales at your expense.
As a result, International is seriously considering
shifting your portion of our buy to alternative
suppliers.
International values the relationship our
companies have created over the years. However,
the relationship is in jeopardy if your lack of cost
competitiveness cannot be overcome. We
therefore require a 5% across the board price
reduction effective August 1, 2002.
J.A. at 4596 (letter from Paul D. Barkus, International, to Robert
S. Harrison, ZFM (June 18, 2002)). In fact, the record shows
that six months prior to this correspondence, International had
attempted to use its relationship with Eaton as leverage to gain
further cost reductions from ZFM. See id. at 3727 (electronic
mail from Paul D. Barkus, International, to Galynn Skelnik,
International (Jan. 11, 2002)) (“I got a phone message from
[ZFM] . . . stating that after much internal discussion they have
decided not to offer any transmission reductions even though
their list prices could be increased. . . . Our strategy was to give
Meritor the impression that our Partnership with Eaton provided
us with HD reductions that would increase Meritor‟s list price if
they didn‟t offset the widened price gap. That started out as a
bluff, but when we look at our option prices between the two
supplier[s] there appears to be some cost/price inconsistency.”).
In sum, because appellees failed to produce evidence to show
83
that the LTAs and their voluntary, above-cost market-share
target rebates could have or did foreclose competition in any,
much less a substantial, share of the market, notwithstanding the
jury‟s verdict it is obvious that appellees‟ claims must fail under
Tampa Electric.
Before moving on, I think it appropriate to make a final
point on the importance of the Tampa Electric standard and to
illuminate fully why I depart from the majority‟s application of
that case. As I already have noted, exclusive-dealing contracts
are not per se unlawful and, indeed, may lead to more
competition in the marketplace as firms compete for such
potentially lucrative arrangements. Accordingly, one must ask
why antitrust law ever would forbid such contracts. The reason,
as the Supreme Court‟s Tampa Electric standard makes clear, is
that where there is such an agreement, the seller‟s competitors
cannot compete for the percentage of the market that a purchaser
needs because the purchaser has signed a contract to deal only in
the goods of that particular seller (or has signed a contract that
has that practical effect). Even if the seller‟s competitors can
offer a better deal to the purchaser, the purchaser is precluded
from accepting competing offers because they have entered the
exclusive-dealing arrangement. Cf. Standard Oil, 337 U.S. at
314, 69 S.Ct. at 1062 (requirements contract violated Section 3
because “observance by a dealer of his requirements contract
with Standard does effectively foreclose whatever opportunity
there might be for competing suppliers to attract his patronage,
and . . . the affected proportion of retail sales of petroleum
products is substantial”). Therefore, competition is foreclosed
in that percentage of the marketplace and under Tampa Electric
the question is simply whether that foreclosure is substantial,
84
considering the quantity of the foreclosure and the qualitative
aspects of the marketplace and the agreement itself.
It is that foreclosure of competition, the elimination of
the possibility that the seller‟s competitors can capture that
portion of the market through vigorous competition, with which
Section 3 (and Section 1 of the Sherman Act in exclusive-
dealing cases) is concerned. See Tampa Elec. Co., 365 U.S. at
328, 81 S.Ct. at 629 (emphasis added) (observing that “the
ultimate question” is “whether the contract forecloses
competition in a substantial share of the line of commerce
involved”). The Tampa Electric market-foreclosure analysis
thus assumes that a circumstance existed which appellees seek
and fail to prove existed here: that there was an exclusive-
dealing arrangement between a market seller and purchaser.
Now consider the case at hand. The parties do not
dispute that the LTAs did not require the OEMs to purchase
anything, much less 100% of their needs, from Eaton and
appellees do not contend that Eaton‟s prices were below cost.
Accordingly, appellees remained free at all times to compete for
the OEMs‟ (and the truck purchasers‟) business. Appellees, if
they were equally efficient competitors, were at liberty to offer
lower prices, better products, more logistical and technical
support, or any other myriad considerations to make their
products more attractive to the OEMs, and the OEMs and the
truck purchasers were at all times free to accept appellees‟
products and services. Accordingly, the LTAs did not foreclose
competition in any portion of the market. This basic point —
that the LTAs were not in fact exclusive-dealing arrangements
that foreclosed competition in any portion of the market —
85
explains appellees‟ failure to identify before us any credible,
precise percentage of market foreclosure. Appellees‟ failure to
meet their burden under Tampa Electric to prove any
quantitative degree of market foreclosure should spell the end of
their Section 3 and Section 1 claims.
Although I believe that appellees‟ failure in this regard
renders unnecessary discussion of the qualitative analysis under
Tampa Electric, I note briefly that contrary to the majority‟s
discussion, the qualitative inquiry elucidates further why the
LTAs did not violate Section 3. Contrary to the majority‟s
statement that the long duration of the contracts added to their
alleged anticompetitiveness, the duration of the LTAs is of little
to no significance because they did not actually preclude the
OEMs from purchasing competitors‟ products at any time during
the life of the LTA. Because the OEMs were free to walk away
from the discounts at any time it does not matter how long Eaton
promised to offer those discounts to the OEMs.
Moreover, a claim of lack of ease of terminability is
likewise a non-starter given the LTAs were terminable at will;
the agreements simply would have lost their force once the
OEMs decided to seek Eaton‟s competitors‟ products and forego
the market-share rebate.42 The majority denies that the LTAs
42
Although I conclude that the LTAs did not foreclose
competition in any portion of the market, if as the majority
concludes, the LTAs did foreclose competition in the market,
that alleged foreclosure effect necessarily was diminished by the
fact that the LTAs at most blocked only one avenue of reaching
the end-users, i.e., the truck purchasers. Component part
86
were easily terminable by reasoning that “the OEMs had a
strong economic incentive to adhere to the terms of the LTAs,
and therefore were not free to walk away from the agreements.”
Typescript at 52. I reject the majority‟s ipse dixit reasoning on
this point. While Eaton offered through the LTAs financial
incentives that undoubtedly served as the OEMs‟ motivation to
meet the market-share targets, the LTAs‟ promise of financial
reward does not mean that the OEMs were not at liberty to leave
the LTAs behind to take up a more attractive offer. Economic
incentives are by their nature fluid and the OEMs‟ incentives
might have shifted in the face of a more financially appealing
option.
Additionally, “[t]he existence of legitimate business
justifications for the contracts also supports the legality of the . .
. contracts.” Barr Labs., 978 F.2d at 111. In this regard,
evidence that the defendant‟s actions were motivated by an
ordinary business motive is significant. See Aspen Skiing Co. v.
Aspen Highlands Skiing Corp., 472 U.S. 585, 608, 105 S.Ct.
2847, 2860 (1985) (noting that “[p]erhaps most significant . . . is
the evidence related to [defendant] itself, for [defendant] did not
persuade the jury that its conduct was justified by any normal
business purpose”). Eaton contends that the LTAs were
designed to meet the OEMs‟ demands to lower prices by
consolidating their component part suppliers and that the OEMs
manufacturers, including ZFM, can and do advertise directly to
truck purchasers and are able to offer discounts directly to those
consumers as an incentive for them to select their parts from
their data books, and truck purchasers were at all times free to
select appellees‟ products.
87
entered the contracts because they afforded the best possible
prices. As I noted above, the record supports this assertion as
representatives from each of the OEMs testified that the OEMs
entered into the LTAs because those agreements were
financially attractive, and ZFM itself noted in 2001 that the
OEMs sought a single-source supplier.43 Additionally, an Eaton
representative testified that when the OEMs increase their
purchases of Eaton‟s products, Eaton is able to “translate that
volume into [a] lower cost base, [and] come up with the funds
and the revenue to give them [the OEMs] more competitive
pricing, which is what they were asking for.” J.A. at 1398.
In a similar circumstance, we concluded that a defendant
drug manufacturer offered valid business justifications to defeat
its competitor‟s Section 1 and Section 3 claims, which attacked
the defendant‟s offer of contracts that provided volume-based
discounts to warehouse chain drug stores. See Barr Labs., 978
F.3d at 104-05. We found that there were “legitimate business
justifications for the contracts” because “the evidence
established that the warehouse chains [that carried defendant‟s
products] entered the contracts because of the inherent
advantages they saw in them in price, convenience, and service”
and “[t]he contracts also proved advantageous from Abbott‟s
perspective in terms of reaping business goodwill, and as
providing high volume, low transaction cost outlets for Abbott‟s
43
The majority states that the procompetitive justifications of the
LTAs are diminished by the fact that no OEM asked Eaton to be
a sole supplier. My response to that assertion is as simple as
remarking once more that the LTAs did not by their terms or by
their effect make Eaton a sole supplier for any of the OEMs.
88
manufacturing capacity.” Id. at 111; see also Virgin Atl.
Airways, 257 F.3d at 265 (finding that defendant proffered pro-
competitive justification for market-share incentive agreement
because such agreements “allow firms to reward their most loyal
customers” and “[r]ewarding customer loyalty promotes
competition on the merits”); Barry Wright, 724 F.2d at 237(finding legitimate business justification for requirements
contracts because for the purchaser “the contracts guaranteed a
stable source of supply, and, perhaps, more importantly, they
assured [the purchaser] a stable, favorable price” and for the
seller “they allowed use of considerable excess . . . [product]
capacity and they allowed production planning that was likely to
lower costs”).
Undoubtedly, Eaton was motivated to tender the LTAs
because of its desire to increase sales of its product. Although
such a motivation could not excuse otherwise anticompetitive
conduct, the desire to sell more product is an ordinary business
purpose, and the antitrust laws do not prohibit such motivation.
As the Supreme Court stated in Cargill, “competition for
increased market share[] is not activity forbidden by the antitrust
laws. It is simply . . . vigorous competition.” 479 U.S. at 116,
107 S.Ct. at 492 (emphasis added); see also Concord Boat, 207
F.3d at 1062 (noting that defendant‟s proffered reason that it
was “trying to sell its product” through market-share discounts
constituted valid, pro-competitive business justification for
program); Stearns Airport Equip. Co. v. FMC Corp., 170 F.3d
518, 524 (5th Cir. 1999) (observing that defendant‟s explanation
that “it was trying to sell its product” was valid business
justification).
89
Tampa Electric makes clear that “it is the preservation of
competition which is at stake” under Section 3. 365 U.S. at 328,
81 S.Ct. at 628 (emphasis added and internal quotations marks
and citation omitted). Here, appellees remained free at all times
to compete for the OEMs‟ business and directly for customers‟
business and yet the majority permits a jury to condemn the
LTAs. I cannot join in that conclusion. Appellees failed to
supply an evidentiary basis to establish that the LTAs had the
probable effect of foreclosing competition in a substantial share
of the market and thus they failed to produce evidence that could
demonstrate that Eaton violated Section 3 of the Clayton Act.
Because Section 3 of the Clayton Act sweeps more broadly than
Section 1 of the Sherman Act, appellees likewise failed to show
that Eaton violated Section 1.
C. Sherman Act Section 2 Claim
Appellees presented the same evidence and same de facto
exclusive dealing theory on which they based their Section 2
claim as they did to support their Clayton Act Section 3 and
Sherman Act Section 1 claims. In light of my lengthy analysis
of appellees‟ other claims, I will abbreviate my discussion of
their Section 2 claim.
Section 2 targets defendants who “monopolize or attempt
to monopolize, or combine or conspire with any other person or
persons, to monopolize any part of the trade or commerce
among the several States, or with foreign nations.” 15 U.S.C. §
2. To establish a Section 2 violation, a plaintiff must show that:
(1) the defendant possessed monopoly power in the relevant
market and (2) the defendant willfully acquired or maintained
90
that power “as distinguished from growth or development as a
consequence of a superior product, business acumen, or historic
accident.” Eastman Kodak Co. v. Image Tech. Servs., Inc., 504
U.S. 451, 481, 112 S.Ct. 2072, 2089 (1992) (quoting United
States v. Grinnell Corp., 384 U.S. 563, 570-71, 86 S.Ct. 1698,
1704 (1966)). Eaton acknowledges that it has monopoly power
in the NAFTA HD truck transmission market, and thus I focus
my discussion on whether it has maintained that monopoly
through unlawful means.
A monopolist willfully acquires or maintains monopoly
power in contravention of Section 2 if it “attempt[s] to exclude
rivals on some basis other than efficiency.” Aspen Skiing Co.,
472 U.S. at 605, 105 S.Ct. at 2859. “Anticompetitive conduct
may take a variety of forms, but it is generally defined as
conduct to obtain or maintain monopoly power as a result of
competition on some basis other than the merits.” Broadcom
Corp. v. Qualcomm Inc., 501 F.3d 297, 308 (3d Cir. 2007)
(citation omitted). “[E]xclusive dealing arrangements can be an
improper means of maintaining a monopoly.” Dentsply, 399
F.3d at 187 (citing Grinnell Corp., 384 U.S. 563, 86 S.Ct. 1698;
LePage‟s, 324 F.3d at 157).
The District Court denied Eaton‟s motion seeking a
judgment as a matter of law on appellees‟ Section 2 claim as it
concluded that “[t]he jury found that [Eaton] had willfully
acquired or maintained its monopoly power through LTAs that
amounted to de facto exclusive dealing contracts having the
power to foreclose competition from the marketplace.” ZFM,
769 F. Supp. 2d at 697 (emphasis added). In this regard, the
Court concluded that “„neither proof of exertion of the power to
91
exclude nor proof of actual exclusion of existing or potential
competitors is essential to sustain a charge of monopolization
under the Sherman Act.‟” Id. (quoting LePage‟s, 324 F.3d at
148).
The District Court‟s finding on this point reflected its
misunderstanding of the requirements of Section 2. As we
recently stated in Dentsply:
Unlawful maintenance of a monopoly is
demonstrated by proof that a defendant has
engaged in anti-competitive conduct that
reasonably appears to be a significant contribution
to maintaining monopoly power. Predatory or
exclusionary practices in themselves are not
sufficient. There must be proof that competition,
not merely competitors, has been harmed.
399 F.3d at 187 (citing LePage‟s, 324 F.3d at 162) (emphasis
added) (citations omitted); see also Broadcom, 501 F.3d at 308(“[T]he acquisition or possession of monopoly power must be
accompanied by some anticompetitive conduct on the part of the
possessor.”) (citing Verizon Commc‟ns Inc. v. Law Offices of
Curtis V. Trinko, LLP, 540 U.S. 398, 407, 124 S.Ct. 872, 878-
79 (2004)).
Indeed, in Dentsply we made clear that a plaintiff‟s
demonstration that the defendant merely possessed the power to
exclude is not a sufficient basis on which to build a claim that
the defendant is culpable under Section 2; a plaintiff must show
that the defendant used its power to foreclose competition. See
92
399 F.3d at 191 (“Having demonstrated that Dentsply possessed
market power, the Government must also establish the second
element of a Section 2 claim, that the power was used „to
foreclose competition.‟”) (quoting United States v. Griffith, 334
U.S. 100, 107, 68 S.Ct. 941, 945 (1948)) (emphasis added). As
the Supreme Court explained in Trinko:
The mere possession of monopoly power, and the
concomitant charging of monopoly prices, is not
only not unlawful; it is an important element of
the free-market system. The opportunity to
charge monopoly prices — at least for a short
period — is what attracts „business acumen‟ in
the first place; it induces risk taking that produces
innovation and economic growth. To safeguard
the incentive to innovate, the possession of
monopoly power will not be found unlawful
unless it is accompanied by an element of
anticompetitive conduct.
540 U.S. at 407, 124 S.Ct. at 879 (emphasis in original).
“Conduct that merely harms competitors . . . while not
harming the competitive process itself, is not anticompetitive.”
Broadcom, 501 F.3d at 308; see also Spectrum Sports, Inc. v.
McQuillan, 506 U.S. 447, 458, 113 S.Ct. 884, 892 (1993) (The
Sherman Act “directs itself not against conduct which is
competitive, even severely so, but against conduct which
unfairly tends to destroy competition itself.”). To determine
whether a practice is anticompetitive in violation of Section 2,
we consider “whether the challenged practices bar a substantial
93
number of rivals or severely restrict the market‟s ambit.”
Dentsply, 399 F.3d at 191 (citations omitted). Thus, the
standard for ascertaining whether certain conduct is
anticompetitive under Section 2 is quite similar to the market-
foreclosure analysis under Section 3 of the Clayton Act.
“Conduct that impairs the opportunities of rivals and either does
not further competition on the merits or does so in an
unnecessarily restrictive way may be deemed anticompetitive.”
W. Penn Allegheny Health Sys., 627 F.3d at 108 (internal
quotation marks and citation omitted).
Accordingly, for largely the same reasons that appellees‟
Section 3 and Section 1 claims fail, so, too, does their Section 2
claim. Because the LTAs did not obligate the OEMs to
purchase anything from Eaton and did not condition the rebates
on Eaton having a 100% market share and because its prices
were at all times above-cost, the LTAs allowed any equally
efficient competitor, including appellees, if they were equally
efficient competitors, to compete. Thus, the LTAs did not bar
Eaton‟s competitors from the market nor did the LTAs impair
their opportunities to compete with Eaton for the business the
LTAs covered. Cf. NicSand, Inc. v. 3M Co., 507 F.3d 442, 452
(6th Cir. 2007) (en banc) (plaintiff failed to demonstrate
antitrust injury under Sherman Act Section 2 because
defendant‟s rebates and up-front payments to retailers pursuant
to exclusive dealing contract were above-cost).
In this regard, the LTAs stand in stark contrast to the
contracts at issue in Dentsply, a case on which appellees and the
majority rely heavily. In Dentsply we considered whether
Dentsply, a monopolist in the field of the production of artificial
94
teeth, violated Section 2 of the Sherman Act through a provision
called “Dealer Criterion 6” in its contracts with dealers, who, in
turn, sold the products to dental laboratories. See 399 F.3d at
184-85. The provision, which Dentsply “imposed . . . on its
dealers” prohibited the dealers from adding non-Dentsply tooth
lines to their product offering. See id. Dealers who carried
competing lines prior to the implementation of Dealer Criterion
6 were permitted to continue carrying non-Dentsply products,
but Dentsply enforced Dealer Criterion 6 against all other
dealers. See id.
We concluded that Dealer Criterion 6 violated Section 2
because “[b]y ensuring that the key dealers offer Dentsply teeth
either as the only or dominant choice, Dealer Criterion 6 ha[d] a
significant effect in preserving Dentsply‟s monopoly.” Id. at
191. We noted that “Criterion 6 impose[d] an „all-or-nothing‟
choice on the dealers” and “[t]he fact that dealers ha[d] chosen
not to drop Dentsply teeth in favor of a rival‟s brand
demonstrates that they ha[d] acceded to heavy economic
pressure.” Id. at 196. Accordingly, we concluded that Dealer
Criterion 6 harmed competition by “keep[ing] sales of
competing teeth below the critical level necessary for any rival
to pose a real threat to Dentsply‟s market share.” Id. at 191.
Criterion 6 so limited competitors‟ sales because Dentsply‟s
competitors realistically could not hope to compete solely
through direct sales to laboratories and because “[a] dealer
locked into the Dentsply line [wa]s unable to heed a request for
a different manufacturers‟ product . . . .” Id. at 194.
Unlike Dealer Criterion 6, the LTAs did not impose an
“all-or-nothing” choice on the OEMs because they did not
95
prohibit the OEMs from purchasing or from offering to its HD
truck purchasers non-Eaton transmissions. Accordingly, the
LTAs did not suppress sales of appellees‟ products because the
OEMs were able to and, in fact, did heed truck purchasers‟
requests for ZFM‟s products. Critically, at all times, truck
purchasers retained the freedom to make the ultimate decision
with respect to the transmissions they would select. Thus, the
situation here differs from that in Dentsply because the LTAs
did not have the effect of making Eaton the only choice for truck
purchasers nor did it impair the purchasers‟ choice in the
marketplace. See J.A. at 1530 (deposition testimony of Paul D.
Barkus, International) (indicating that International‟s LTA
included a clause explicitly stating that International was not
precluded from dealing in Eaton‟s competitors‟ products
because International “would never jeopardize a condition of
sale based on a customer specifying a product that [it] would
refuse to provide”).
Adding to the specter of restricted customer choice, the
majority states that the OEMs worked with Eaton to force feed
Eaton‟s products to customers and to shift truck fleets from
using ZFM transmissions to Eaton transmissions. It appears that
there is some evidence in the record for the unsurprising
contention that the OEMs sought to meet the market share
targets and thus obtain the rebates in part by persuading their
customers to select Eaton‟s products. Indeed, in all walks of life
if a salesperson has more to gain by selling a customer product
X as opposed to product Y it is to be expected that the
salesperson will push the customer to select product X.
Ultimately, however, the majority does not and cannot dispute
the fact that the HD truck purchasers at all times were free to
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select any transmission, including ZFM‟s transmissions, for
their truck orders.
Though appellees also assert that the LTA provisions that
required the OEMs to list Eaton‟s products as the preferred and
standard option in their data books constituted anticompetitive
conduct, those provisions no more support appellees‟ case than
the rebates that the LTAs provided. Appellees claim that the
provisions were anticompetitive because they required the
OEMs to charge artificially higher prices for ZFM‟s products
than for Eaton‟s. This is not the case, however, because the
terms of the LTAs only required that the OEMs ensure that
Eaton was priced as the lowest-cost option, which, with respect
to the OEMs, was at all times the case.
As a PACCAR representative explained, a component
part manufacturer “is going to get a preferred position in the
data book as long as . . . [it is] competitive in the marketplace,
and being competitive in the marketplace means that . . . [it has]
the lowest total cost to PACCAR, total cost, not just price, total
cost.” Id. at 1553. A competitor manufacturer‟s product will be
listed “at a premium . . . because that other transmission . . . is at
a higher cost to PACCAR.” Id. at 1552. Indeed, that
representative confirmed that data book positioning was in fact
“a leverage point for [PACCAR] to negotiate . . . [to] manage
[its] supply base.” Id. at 1553. Accordingly, Eaton‟s demand
that the OEMs preferentially price its products reflected the fact
that those transmissions came at the lowest cost to the OEMs
and the fact that Eaton had made certain price concessions to the
OEMs in exchange for that favorable listing, a practice that was
apparently commonplace in the HD truck transmission market.
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Furthermore, the demand had the added consequence of
assuring Eaton that it receive the favorable promotion for which
it had bargained through its price concessions. If the LTAs did
not include requirements regarding data book placement, an
OEM would have been able to purchase Eaton‟s transmissions at
a low cost while listing Eaton‟s products at a higher cost to the
truck purchasers than ZFM‟s products in its data book, thereby
reaping a greater profit on Eaton‟s transmissions. It was entirely
reasonable for Eaton to avoid this scenario by insisting that the
OEMs‟ data books reflect that Eaton‟s transmissions were the
lowest-cost, highest-value product.
As the majority notes, it is unclear from the record
whether the OEMs arrived at the preferential price by lowering
the price of the preferred option or by raising the price of the
non-preferred options until the preferred component part was the
lowest-cost option. The LTAs simply required that the OEMs
list Eaton as the preferred option but they did not require that the
OEMs take either path in doing so, and thus it appears that the
OEMs had the discretion to decide in which way they would
make Eaton the preferred option. Of course, from the OEMs‟
perspective, keeping the price of Eaton‟s products stable and
raising the price of Eaton‟s competitors‟ products was the more
financially attractive option than keeping the prices of Eaton‟s
competitors‟ products stable and dropping the price of Eaton‟s
products and, as the majority points out it appears there is some
evidence in the record that the OEMs took the first path.44
44
Thus, as the majority notes, in an email exchange between
Eaton and Freightliner representatives a Freightliner
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Nevertheless, to the extent that the OEMs in some
instances may have decided to ZFM‟s raise the cost of
transmissions to arrive at the preferential price for Eaton‟s
transmissions or to make Eaton‟s transmissions appear more
favorable to their customers in an effort to achieve the market-
share targets and receive the rebates, such conduct reasonably
cannot be attributed to Eaton as neither the LTAs nor Eaton
elsewhere required that the OEMs do so. Additionally, it is
clearly telling with respect to data book placement provisions
that prior to 2001 Meritor had a three-year LTA with
representative stated that its LTA with Eaton required it to price
ZFM‟s products at a $200 premium. Yet, Freightliner‟s LTA
did not require that Freightliner price ZFM‟s products at a
premium; it simply required that Eaton‟s products be the lowest-
priced option. In light of the silence of Freightliner‟s LTA as to
this issue, I can interpret this exchange only to mean that
Freightliner had elected to price Eaton‟s products preferentially
by imposing the $200 premium on ZFM‟s products. Likewise, it
appears that International and PACCAR may have imposed
charges on customers who selected ZFM‟s products but neither
their respective LTA nor Eaton itself required them to do so. In
fact, as noted, at least in regard to International, there is
evidence in the record that suggests that the data book price
increases for ZFM‟s transmissions were a product of
International‟s realization in 2002 that its current price for
ZFM‟s products did not reflect accurately the cost of that
product to International. See J.A. at 3727 (e-mail from Paul D.
Barkus, International, to Galynn Skelnik, International (Jan. 11,
2002)) (proposing that International increase ZFM‟s list prices
to bring them “in line with where they should be”).
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Freightliner, under which Meritor reduced the prices of its
component parts if Freightliner listed those parts as the standard
option. Furthermore, there is evidence in the record that as of
June 2002, ZFM itself was attempting to achieve exclusive
listing in PACCAR‟s data book. See id. at 3394 (electronic
correspondence from Tom Floyd, PACCAR, to Christian
Benner, ZFM (June 4, 2002)) (noting that PACCAR was
“extremely disappointed” with ZFM‟s business proposal in part
because PACCAR was “very clear that” ZFM‟s proposal
“should not include requirements regarding exclusive
position[ing]” and that “it would require some extraordinary
benefits for PACCAR in order [for ZFM] to receive
consideration” in that regard).
While Meritor‟s prior LTA and ZFM‟s own attempts to
achieve exclusive data book positioning do not, in themselves,
defeat appellees‟ claim that those tactics are anticompetitive,
their actions are of some significance. Cf. Race Tires, 614 F.3d
at 82 (noting fact that plaintiff created and championed racing
sanctioning bodies‟ rule that required the use of a single brand
of tire during races and later alleged such rule violated the
antitrust law); NicSand, 507 F.3d at 454 (plaintiff‟s prior use of
exclusive-dealing contract undermined its attack on defendant‟s
use of such arrangements). At a minimum, ZFM‟s conduct
belies its contention that the LTAs were far afield from the
normal practice of the HD truck transmission market.
In our consideration of this case we should remember that
“[a]ntitrust analysis must always be attuned to the particular
structure and circumstances of the industry at issue.” Trinko,
540 U.S. at 411, 124 S.Ct. at 881. Practices from industry to
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industry do not come on a one-size-fits-all basis. Here, it
appears that bargaining between the OEMs and their suppliers
regarding data book positioning is quite typical of the
marketplace with which we are dealing. See Race Tires, 614
F.3d at 79 (noting as relevant that it was “a common and
generally accepted practice for a supplier to provide a sports
sanctioning body . . . financial support in exchange for a supply
contract”); Concord Boat, 207 F.3d at 1062 (observing that
“Brunswick‟s competitors also cut prices in order to attract
additional business, confirming that such a practice was a
normal competitive tool within the . . . industry”); see also Trace
X Chem., Inc. v. Canadian Indus., Ltd., 738 F.2d 261, 266 (8th
Cir. 1984) (“Acts which are ordinary business practices typical
of those used in a competitive market do not constitute conduct
violative of Section 2.”).
But appellees‟ case fails for one more reason than its
failure to show that Eaton engaged in anticompetitive conduct,
in that their case also did not include evidence that the LTAs
harmed competition. See Dentsply, 399 F.3d at 187 (“There
must be proof that competition, not merely competitors, has
been harmed.”). Appellees contend that the LTAs harmed
competition by depriving truck buyers of access to the
FreedomLine, which appellees believe was a technologically
innovative product, and by causing truck buyers to pay higher
prices.
With regard to the FreedomLine, it is enough to say once
more that the OEMs and truck purchasers were at all times free
to purchase that transmission as well as any other of ZFM‟s
transmissions, whether or not those transmissions were listed in
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the data books. Additionally, with the exception of
International, the LTAs permitted the OEMs to list all of ZFM‟s
transmissions, including the FreedomLine, in their respective
data books and the OEMs continued to do just that.45
Appellees do not point to any evidence in support of their
contention that truck purchasers paid higher prices as a result of
45
I have not overlooked the fact that International‟s LTA
required it to list Eaton‟s transmissions exclusively. Yet,
International continued to list ZFM‟s manual transmissions, and
it is thus not apparent whether its decision not to list ZFM‟s
automated and automated mechanical transmissions is
attributable to the LTA. Regardless, International‟s failure to
list the FreedomLine, standing alone, did not deprive truck
purchasers of access to the FreedomLine because truck
purchasers were at all times free to specify the use of the
FreedomLine transmission. Furthermore, it is important to note
that HD truck purchasers in many cases were sophisticated
customers in the HD truck market that were aware that ZFM‟s
transmissions were available. Though I recognize that some
purchasers likely were small operators perhaps owning only one
HD truck who may have had limited knowledge of the
differences in available transmissions, certainly the large
purchasers, i.e., big trucking companies, would have been more
knowledgeable with respect to available transmissions. In any
event, we are, after all, not dealing with consumers buying
motor vehicles for their personal use. The transmissions
involved here were installed in vehicles intended for commercial
use, and the owners did not acquire the vehicles to go to the
grocery store.
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the LTAs. The only evidence that I can find in the record
relevant to appellees‟ allegation in this regard is Dr. DeRamus‟
statement in his expert report offered by appellees that after the
LTAs went into effect Eaton reduced its “competitive
equalization” or incentive payments that historically it had paid
to truck buyers as an incentive to them to select Eaton‟s
transmissions. See J.A. at 4830. While Dr. DeRamus put forth
data demonstrating that Eaton decreased its competitive
equalization payments on average by about $100 (dropping from
roughly $500 on average to just below $400 on average) from
1999 to 2007, see id. at 4831, he did not present a scintilla of
evidence that truck purchasers ultimately paid a higher price for
Eaton‟s transmissions during the existence of the LTAs or
following their expiration. Overall, it is clear that his testimony
in this regard as an inadequate basis on which to predicate an
antitrust case. In sum, appellees failed to put forth any — much
less sufficient — evidence that Eaton engaged in
anticompetitive conduct or that Eaton‟s conduct actually harmed
competition, both of which are required elements of a claim
under Section 2.46
46
Even if a plaintiff establishes under Section 2 that “monopoly
power exists” and that “the exclusionary conduct . . . ha[s] an
anti-competitive effect,” “the monopolist still retains a defense
of business justification.” Dentsply, 399 F.3d at 187; Concord
Boat, 207 F.3d at 1062 (“A Section 2 defendant‟s proffered
business justification is the most important factor in determining
whether its challenged conduct is not competition on the
merits.”); Stearns Airport Equip. Co., 170 F.3d at 522 (“The key
factor courts have analyzed in order to determine whether
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III. CONCLUSION
I offer a few final thoughts on this important case, which,
though seemingly complicated, should have an obvious result.
It is axiomatic that “[t]he antitrust laws . . . were enacted for „the
protection of competition not competitors.‟” Brunswick, 429
U.S. at 488, 97 S.Ct. at 697 (quoting Brown Shoe Co. v. United
States, 370 U.S. 294, 320, 82 S.Ct. 1502, 1521 (1962))
(emphasis in original). Yet as often as this refrain is repeated
throughout antitrust jurisprudence, it appears increasingly that
disappointed competitors, on the assumption that their deficient
performances must be attributable to their competitors‟
anticompetitive conduct rather than their own errors in judgment
or shortcomings or their competitors‟ more desirable products or
business decisions, or on the assumption that they can convince
a jury of that view, turn to the antitrust laws when they have
been outperformed in the marketplace. Of course, competitors
can be and sometimes are harmed by their peers‟ anticompetitive
conduct and when they show that is what happened they may
have viable antitrust claims. Yet often it is the case that a
defeated competitor falls back on the antitrust laws in an attempt
to achieve in the courts the goal that it could not reach in the
challenged conduct is or is not competition on the merits is the
proffered business justification for the act.”). As with appellees‟
Section 3 and Section 1 claim, Eaton‟s valid business
justifications for the LTAs undermines the notion that the LTAs
constituted competition on some basis other than the merits in
violation of Section 2.
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properly-functioning competitive marketplace. This case is a
classic demonstration of that process, which so far with respect
to liability even if not damages has been successful. Indeed, I
find it remarkable that appellees‟ case that is predicated on
nothing more than smoke and mirrors has gotten so far.
But the basic facts are clear. Appellees do not bring a
predatory pricing claim because they cannot do so as Eaton‟s
prices were above cost. Instead, they seek refuge in the law of
exclusive dealing to challenge the LTAs, which based on the
record could not be found to be either facially or de facto
exclusive or mandatory. After stripping this case of appellees‟
baseless insinuations that Eaton engaged in coercive or
threatening conduct in regards to the LTAs, it becomes apparent
that the core of appellees‟ claim really is their belief they had a
superior product in the FreedomLine and the disappointing sales
of that product relative to their expectations must have been
attributable to Eaton‟s anticompetitive conduct. See appellees‟
br. at 32 (“Eaton‟s conduct harmed competition and ZFM. For
the first time in this market, a better product, even combined
with offers of discounts, could not elicit additional sales because
Eaton‟s LTAs and other conduct had broken the competitive
mechanism.”). Appellees thus “appear[] to be assuming that if
[Eaton‟s] product was not objectively superior, then its victories
were not on the merits.” Stearns Airport Equip., 170 F.3d at
527.
As the Court of Appeals for the Fifth Circuit stated in
Stearns Airport Equipment in confronting a similar type of
claim, courts are “ill-suited . . . to judge the relative merits of”
the parties‟ respective products. Id. “That decision is left in the
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hands of the consumer, not the courts, and to the extent this
judgment is „objectively‟ wrong, the inference is not that there
has been a[n] [antitrust] violation . . . , but rather that the
winning party displayed superior business acumen in selling its
product.” Id. The truth is that neither judges nor juries have
expertise in determining the best transmission to buy. Certainly,
the purchasers of trucks and transmissions should make
transmission decisions for themselves and so long as appellees
manufactured their transmissions they had a chance to be their
supplier.
I recognize that the record could support a finding that
the FreedomLine was a technological innovation for which
Eaton did not offer a technically comparable product, and I
further recognize that Eaton engaged in vigorous competition
through aggressive but above-cost methods to compensate for
the possible deficiency of their transmission offerings in that
regard. But in the absence of anticompetitive conduct, the
antitrust laws do not forbid Eaton‟s response. See Ball Mem‟l
Hosp., Inc. v. Mutual Hosp. Ins., Inc., 784 F.2d 1325, 1339 (7th
Cir. 1986) (“Even the largest firms may engage in hard
competition, knowing that this will enlarge their market
shares.”) (citations omitted). In reality, however, the record
compels that the conclusion that Eaton was able to maintain its
dominant market position in the face of the availability of the
FreedomLine for myriad reasons, including its capability of
offering the OEMs a full product line, favorable pricing, its
long-standing, positive reputation, and various market forces
that favored an established market player such as Eaton. And it
is also evident from the record, especially from ZFM‟s internal
documents, that there were numerous intervening factors, such
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as ZFM‟s precipitously falling market share, which tellingly
predated the adoption of the LTAs, the market‟s drive towards
full-product line manufacturers, the OEMs‟ hesitancy to
purchase new products, and the severe market downturn, that
disfavored ZFM.47 In the difficult market it faced, Meritor
entered into a joint venture that needed to achieve an almost
one-third market share within approximately four years of the
venture‟s formation to maintain a viable business, an obviously
ambitious goal indeed even when one overlooks the fact that the
joint venture offered a limited product line and a flagship
transmission that cost far more than other transmissions in the
market.
I note finally that courts‟ erroneous judgments in cases
such as this one do not come without a cost to the economy as a
47
I recognize that as the majority points out, certain OEM
representatives speculated that the LTAs damaged significantly
ZFM‟s business and may have caused its ultimate demise. As I
have stated above, it is beyond peradventure to say that “[t]he
antitrust laws . . . were enacted for „the protection of
competition not competitors.‟” Brunswick, 429 U.S. at 488, 97
S.Ct. at 697 (internal quotation marks and citation omitted); see
also Virgin Atl. Airways, 257 F.3d at 259 (“[W]hat the antitrust
laws are designed to protect is competitive conduct, not
individual competitors.”). Even if the LTAs negatively affected
ZFM‟s business, that circumstance is not the salient inquiry in
an antitrust case. The pivotal question is whether the LTAs
negatively affected competition — not a particular competitor —
in the marketplace, and for the reasons I have recited above,
they could not be found to have done that.
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whole. Discounts of all varieties, whether tied to the purchase
of multiple products, exclusivity, volume, or market-share, are
ubiquitous in our society. “Discounts are the age-old way that
merchants induce customers to purchase from them and not
from someone else or to purchase more than they otherwise
would.” Hovenkamp, Discounts and Exclusion, 2006 Utah L.
Rev. at 843. Indeed, market-share discounts can be particularly
pro-competitive because they can result in lower prices for a
broader range of customers as they extend to smaller purchasers
discounts typically reserved for the largest of purchasers under
more common volume-discount programs. See IIIA Areeda &
Hovenkamp, Antitrust Law ¶786b2, at 148. “[L]ower prices
help consumers. The competitive marketplace that the antitrust
laws encourage and protect is characterized by firms willing and
able to cut prices in order to take customers from their rivals.”
Barry Wright Corp., 724 F.2d at 231. Accordingly, “mistaken
inferences in cases such as this one are especially costly,
because they chill the very conduct the antitrust laws are
designed to protect.” Matsushita Elec. Indus. Co., 475 U.S. at
594, 106 S.Ct. at 1360.
Thus, as the Supreme Court has stressed, courts do not
issue these decisions in a vacuum: once we file our opinion in
this case firms that engage in price competition but seek to stay
within the confines of the antitrust laws must attempt to use the
precedent that we establish as a guide for their conduct, at least
if they are subject to the law of this Circuit. This is serious
business indeed.48 For this reason, the Supreme Court has
48
Of course, every decision we make is serious business and I do
not imply otherwise. However, particularly in light of the
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“repeatedly emphasized the importance of clear rules in antitrust
law.” Linkline, 555 U.S. at 452, 129 S.Ct. at 1120-21; see also
Town of Concord v. Bos. Edison Co., 915 F.2d 17, 22 (1st Cir.
1990) (Breyer, C.J.) (Antitrust rules “must be administratively
workable and therefore cannot always take account of every
complex economic circumstance or qualification.”). I confess I
can glean no such clear rule from the majority‟s opinion. I do
not know how corporate counsel presented with a firm‟s
business plan at least if it is a dominant supplier that seeks to
expand sales through a discount program that might be
challenged by competitors as providing for a de facto exclusive
dealing program and asked if the plan is lawful under the
Sherman and Clayton Acts will be able to advise the
management. The sad truth is that the counsel only will be able
to tell management that it will have to take a chance in the
courtroom casino at some then uncertain future date to find out.
If Eaton‟s above-cost market-share rebate program
memorialized in the LTAs, which were neither explicitly nor de
facto exclusive or mandatory, can be condemned as unlawful de
facto partial exclusive dealing on the basis of literally a handful
of disjointed statements that amount at most to unsupported
speculation as to the possibility that Eaton may have stopped
supplying its transmissions if the OEMs did not meet the targets,
firms face a difficult task indeed in structuring lawful discount
programs. “Perhaps most troubling, firms that seek to avoid . . .
liability [for market-share rebate programs] will have no safe
harbor for their pricing practices.” Linkline, 555 U.S. at 452,
current economic climax, the reasoning of a precedential
opinion with such obvious economic repercussions is crucial.
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129 S.Ct. at 1121 (citing Town of Concord, 915 F.2d at 22)
(Antitrust rules “must be clear enough for lawyers to explain
them to clients.”). What I find most troubling is that firms will
play it safe by not formulating discount programs and that the
result of this case will be an increase of prices to purchasers and
the stifling of competition, surely a perverse outcome. It is
ironical that the very circumstance that the majority‟s opinion is
so thoughtful and well crafted that the risk that it poses is so
great. On the other hand, the approach I believe the Supreme
Court‟s precedent compels — applying and giving persuasive
effect to the Brooke Group price-cost test and granting a
presumption of lawfulness to pricing practices that result in
above-cost prices — provides clear direction to firms engaging
in price competition but still allows for an antitrust plaintiff to
allege that a defendant has engaged in attendant anticompetitive
conduct that renders its practices unlawful.
In sum, I conclude that Eaton was entitled to judgment as
a matter of law on liability in all respects. Accordingly, I would
reverse the judgment of the District Court and remand this case
for entry of a judgment in favor of Eaton. My view of this facet
of the case renders it unnecessary for me to consider the
numerous other issues raised on this appeal, including the
District Court‟s decision that appellees suffered antitrust injury,
and its decisions regarding damages and injunctive relief. Thus,
I do not opine on the proper disposition of those matters.
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