United States: Keurig Fights To Dismiss All Antitrust Claims Brought Against It

On July 9, 2015, the Southern District of New York heard oral argument on Keurig Green Mountain's motions to dismiss the three complaints filed by the following plaintiffs: Keurig's competitors (Treehouse Foods, Inc., Bay Valley Foods, LLC, and Sturm Foods, Inc.); Keurig's direct purchasers; and Keurig's indirect purchasers.  All three complaints essentially challenge the same alleged activities: (1) Keurig's design of its 2.0 brewer to purposefully exclude the use of non-Keurig cups; (2) Keurig's creation of over 600 exclusionary contracts with its suppliers and distributors to prevent Keurig's competitors from selling to office customers; (3) Keurig's filing of a baseless patent infringement lawsuit against Treehouse in order to prevent the sale of non-Keurig cups; and (4) Keurig's deception of retailers and consumers about the "lock out" mechanism on the 2.0 brewer and how the mechanism would prevent compatibility with non-Keurig cups.

Indirect Purchasers

In response to these complaints, Keurig advanced three primary arguments in its motions to dismiss.  First, for the indirect purchasers, Keurig argued that they lacked standing due to Illinois Brick.  In that case, the Supreme Court held that indirect purchasers lacked standing to bring federal antitrust damages claims and noted that direct purchasers or competitors are better suited to enforce the antitrust laws.  The indirect purchasers in this case, however, correctly pointed out that they are pursuing state, not federal, antitrust claims.  Moreover, many states have rejected Illinois Brick, including all the state laws relied upon by plaintiffs in their actions.

In response, Keurig argued that the plaintiffs lack antitrust standing because of Associated General Contracts of California, Inc. v. California State Council of Carpenters ("AGC"), a Supreme Court antitrust decision decided six years after Illinois Brick.  In that case, the Supreme Court held that courts should consider the following factors to determine whether a plaintiff has antitrust standing: (1) whether the plaintiff's injury is the type the antitrust statute was designed to prevent; (2) the directness of the injury; (3) the speculativeness of the plaintiffs' damages; (4) the potential for duplicative recovery; and (5) the existence of more direct victims of the antitrust violation. Keurig argued that 19 out of the 22 states under whose laws the indirect purchasers assert claims apply the AGC test.  The indirect purchasers disagreed, arguing that the lower state court opinions cited by Keurig were neither authoritative nor persuasive to the current suits.

Direct Purchasers

Keurig also argued that the direct purchasers of K-cups lacked antitrust standing.  For the direct purchasers, however, Keurig based its argument on Paycom Billing Services, Inc. v. Mastercard International, Inc., a Second Circuit decision that held that the antitrust plaintiff lacked standing because it was not an "efficient enforcer" as per the AGC factors.  In Paycom, a payment processor challenged MasterCard's rule preventing MasterCard's member banks from dealing with Discover or American Express, arguing that this rule "foreclos[ed] competition" among the networks.  The court held, however, that Paycom lacked antitrust standing because it did not meet any of the efficient enforcer factors.  For instance, MasterCard's rule only prevented its banks—not Paycom—from accepting Discover or American Express cards.  Plaintiffs in this case argue that Paycom is inapposite because the plaintiff in that case was "in a position analogous to [an] indirect purchaser[]" and rely instead on a more recent Second Circuit decision, In re DDAVP Direct Purchaser Antitrust Litigation.  In that case, the Second Circuit held that direct purchasers did have standing to pursue antitrust claims where they suffered an antitrust injury due to an unlawful patent forcing plaintiffs—direct purchasers of the patented product—to pay higher prices in the market.  We await the court's decision on the applicability of those decisions to the standing of plaintiffs here.

Competitors

Finally, in Keurig's motions to dismiss the antitrust claims brought by its competitors—including monopolization, tying, exclusive dealing, and conspiracy claims—Keurig raises two principal arguments as to why its conduct was not anticompetitive.  First, Keurig asserts that the plaintiffs, Treehouse in particular, have seen continuous growth in its "K-cup" sales despite any alleged anticompetitive behavior by Keurig.  Furthermore, though plaintiffs allege that Keurig erected barriers to entry through 600 exclusive dealing agreements, Keurig contends that these arrangements with its suppliers were necessary to cure the free riding problem that would materialize if plaintiffs had access to Keurig's suppliers without incurring any training costs.

The competitor-plaintiffs responded by arguing that Keurig's 600 contracts were deliberately implemented to suppress competition and that the contracts were not reasonable in length, some spanning many years.  The plaintiffs challenged Keurig's free-riding argument on the ground that it was a just a pretext for eliminating its competitors from the market because in those supply agreements Keurig only restricted its suppliers from selling the same products to Keurig's competitors for the purpose of making a Keurig-brewer-compatible cup—not for other purposes.  Thus, the plaintiffs argued that Keurig "is not protecting against free-riding on its investments, but is rather blocking competitors from accessing inputs and distribution networks that others created."  Furthermore, the competitor-plaintiffs asserted that, to establish antitrust injury, an antitrust plaintiff need not establish that it lost sales or could not otherwise enter the market.  Rather, where, as here, plaintiffs claim that their sales would have been greater had Keurig not engaged in the alleged anticompetitive behavior, plaintiffs contend that they have sufficiently alleged antitrust injury.

The court heard oral argument last Thursday on these three motions to dismiss and its decision will likely clarify who among a manufacturer's competitors and direct and indirect consumers may bring antitrust claims in the future.

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