Paul B. Hewitt

1. Category Management:Comparing Theories ofPotential Liability UnderSections 1 and 2 of The Sherman Act Paul B. Hewitt American Bar Association Section of Antitrust Law2005 Annual Spring MeetingSherman Act Section 2 CommitteeHot Topics Program

2. Background • Category Management (CM): Definitionand purpose • Key CM decisions: Product selection, shelf space, promotions, pricing • Retailers may act independently or assisted by Category Captain (CC) • CC may propose plan for all competing products • Retailer may defer to CC’s (self-interested) expertise

3. Competitive Effects • Potential efficiencies: optimized shelf space; efficient pricing and promotions; expanded output • Collusionconcerns • Information sharing via retailer • Collusion between competing suppliers or competing retailers • Exclusionconcerns • CC as “fox in the chicken coop” excluding rivals

4. Short Antitrust History • Lopsided ratio of legal and economic commentary vs. actual court decisions • FTC and DOJ: no cases • Several investigations, hearings, staff report, speeches • Handful of private cases • Conwood Co. v. United States Tobacco Manufacturing Co.,290 F.3d 768 (6th Cir. 2002) • El Aguila Food Products Inc. v. Gruma Corp.,301 F. Supp. 2d 612 (S.D. Tex. 2003) • R.J. Reynolds Tobacco Co. v. Philip Morris Inc.,60 F. Supp. 2d 502 (M.D.N.C. 1999) • R.J. Reynolds Tobacco Co. v. Philip Morris Inc.,199 F. Supp. 2d 362(M.D.N.C. 2002), aff’d, 67 Fed. Appx. 810 (4th Cir. June 24, 2003) • Louisa Coca-Cola Bottling Co. v. Pepsi-Cola Metropolitan Bottling Co.,94 F. Supp. 2d 804 (E.D. Ky. 1999)

5. Antitrust Liability: Three Issues 1.Does Retailer Acceptance of the CC’s Recommended CM Plan Create a § 1 Agreement? • Colgate: • May be complete § 1 defense where retailer simply acquiesces in proposed marketing plan United States v. Colgate & Co.,250 U.S. 300 (1919) • “Mere” acquiescence, without coercion, creates no agreement • But if manufacturer goes beyond suggesting prices “and takes affirmative action to achieve . . . adherence,” a § 1 agreement may result United States v. Parke, Davis & Co.,362 U.S. 29, 47 (1960)

6. Antitrust Liability: Three Issues • Monsanto: • Acting “in response to” third party request yields no inference of agreement without “evidence that tends to exclude the possibility of independent action.” Monsanto Co. v. Spray-Rite Service Corp.,465 U.S. 752, 763, 768 (1984)

7. Antitrust Liability: Three Issues 2.Are CC/Retailer Relations Vertical or Horizontal(and what difference does it make)? • Colgate and Monsanto: involve restrictions on intrabrand competition • Commissioner Leary: horizontal analysis where CC’s plan would regulate interbrand competition, e.g., shelf space, pricing of competitors’ products • If horizontal: easier to infer agreement; risk of perse illegality

8. Antitrust Liability: Three Issues • But, even in horizontal setting, inference of agreement must be plausible Matsushita • In re High Fructose Corn Syrup Antitrust Litig.(7th Cir. 2002) (“More evidence [of collusion] is requiredthe less plausible the charge of collusive conduct.”) • Commissioner Leary: no per se treatment because CM is novel; insufficient judicial experience

9. Antitrust Liability: Three Issues • Horizontal treatment of CC/retailer relations counter to Sharp Electronics: • “Restraints imposed by agreement between competitors have traditionally been denominated as horizontal restraints, and those imposed by agreement between firms at different levels of distribution as vertical restraints . . . [A] restraint is horizontal not because it has horizontal effects, but because it is the product of a horizontal agreement.” (emphasis added). Business Electronics Corp. v. Sharp Electronics Corp.,485 U.S. 717, 730 & n.4 (1988)

10. Antitrust Liability: Three Issues • CC and retailer not horizontal competitors. Retailer’s competitors are other retailers – even where private label products implicated • Interbrand effects can be fully examined in a rule of reason vertical case

11. Antitrust Liability: Three Issues 3.Can “Mere Suggestions” Qualify As Unlawful § 2 Exclusionary Conduct? • Different issue than under § 1, because § 2 applies to unilateral conduct • Paradigm facts: • Monopolist manufacturer is CC for most retailers in relevant market • CC simply recommends plan for all competitors’ products • No coercion, threats, “fox in the chicken coop” conduct • Retailer adopts the plan • CC benefits – at expense of competing suppliers • Potential § 2 liability? Issue goes to heart of what it means to “monopolize”

12. Antitrust Liability: Three Issues • Conwood: Leading § 2 CM Case • Facts: USTC, snuff monopolist, was CC for retailers across the country. Sixth Circuit affirmed a $1.05 billion § 2 monopolization judgment. Key conduct: • Destroying competitors’ in-store displays • “pervasive practice of destroying [plaintiff’s] racks and POS [in-store display] materials and reducing the number of [plaintiff’s] facings through exclusive agreements with and misrepresentations to retailers.”Id. at 788 • “Burying” competitors’ products on shelves • “USTC and not retailers controlled facing decisions . . . USTC sales representatives purposely attempted to bury [plaintiff’s] products.”Id. at 790 • Lying to retailers • USTC “provided false information to retailers to get them to maintain USTC’s poor selling items while dropping competitors’ products”290 F.3d at 776 • Suggestions in Conwood: “probative of intent” – unlawful when accompanied by misrepresentations or CC self-help

13. Antitrust Liability: Three Issues • “Suggestions” by the CC can be unlawful § 2 exclusionary conduct where: • “Suggestions” are not just suggestions – because retailer abdicates control to CC • Is CC truly in control OR is retailer still calling the ultimate shots? • Conwood: retailers abdicated control to CC • Gruma: Retailers adopt category-wide (tortilla) shelf space plan proposed by CC. Smaller competitors complain under § 2: • “little or no input into category design” – “placed in unfavorable shelf positions.” 301 F. Supp. 2d at 615 n.5. • Held – no unlawful § 2 exclusion: “the retailers, not Gruma, approve placements.”Id. • Louisa: Increased shelf space allocated to dominant soft drink bottler, held not the result of § 2 exclusionary conduct: • “no evidence . . . that Pepsi can control . . . retailers’ decisions or has the power to exclude its rivals’ productsoutright . . .” “store owners . . . allot shelf, storage and display space at their sole discretion based on such factors as the market’s demand for a product.”94 F. Supp. 2d at 814

14. Antitrust Liability: Three Issues • Suggestions are accompanied by material misrepresentations relied on by retailer • Must distinguish “mere” salesmanship from lying • Conwood: CC presented false sales data in successful effort to persuade retailer to drop competitor’s product • Subsequent 6th Circuit case emphasizes that statements must be “clearly false” to violate § 2: Permitting antitrust liability for merely potentially misleading or ‘true but misleading statements’ would chill procompetitive conduct. Therefore, a plaintiff in an antitrust suit . . . must present evidence that would permit the jury to conclude that the statements were clearly false American Council of Certified Podiatric Physicians and Surgeonsv. American Board of Podiatric Surgery,323 F.3d 366, 372 n.7 (6th Cir. 2003) • Similarly, DC Circuit held Microsoft affirmative misrepresentations unlawful exclusionary conduct United States v. Microsoft Corp.,253 F.3d 34, 99-101 (D.C. Cir. 2001) (campaign of misrepresentations – deceiving software developers into designing new Java applications that would function only on Microsoft platform – represented unlawful § 2 exclusionary conduct)

15. Antitrust Liability: Three Issues • No § 2 liability for merely recommending CM plan, absent coercion or misrepresentations • Even if recommended plan also addresses competitors’ products • To conclude otherwise would fundamentally alter monopolization law and impose a tort-like strict liability • Unlike unilateral exclusion in Aspen Skiing, other monopoly refusal to deal cases, here “the active approval of the consumer – the party the Act protects” is required. Decisions on product selection, pricing, shelf space are “always ultimately in the hands of the consumer.” Stearns Airport Equipment Co. v. FMC Corp.,170 F.3d 518, 524 (5th Cir. 1999) (no § 2 liability for recommendations to customer designed to skew bid specifications) Santana Products Inc. v. Bobrick Washroom Equipment, Inc.,2005 WL 293473 at *7 (3d Cir. Feb. 9, 2005)(marketing campaign designed to influence product standards held not actionable because “defendants’ marketing campaign was aimed primarily at persuading government architects to specify [defendant’s] materials instead of [plaintiff’s] . . . It was the architects who would make the ultimate decision of which product to specify for use.”)

16. Antitrust Liability: Three Issues • Key issue in future CM monopolization cases: does CC have de facto control? • Caution required; could be fact question for jury • Cf. State action “active supervision” requirement