United States: Supreme Court's Decision Not To Hear Manufacturer's Appeal Of $156 Million Antitrust Award Reinforces That "Refusals To Deal" Can Be A Minefield For Manufacturers

When a manufacturer declines to do business with a distributor, very real antitrust risks can arise from that action. Recent inaction by the Supreme Court, in response to an appellate court's condemnation of a manufacturer's refusal to deal with a distributor, illustrates this point. 

In litigation that started in Texas federal court and ended at the United States Supreme Court, a steel distributor ("MM") alleged that certain steel manufacturers joined a conspiracy, hatched by two of MM's distributor competitors, to boycott steel sales to MM.1 Stated differently, MM asserted a conspiracy to refuse to deal with MM. 2 MM claimed this conduct constituted a per se violation of the Sherman Act, Section 1. 3 At trial, a jury found MM had proven the boycott conspiracy and that the manufacturer defendants ("JSW" and "Nucor") had joined the conspiracy. 4 The jury awarded MM $52,000,000 in damages, which, pursuant to law, was trebled to $156,000,000. 5 JSW and Nucor, the manufacturer defendants, separately appealed the finding of antitrust liability. Each claimed the evidence as to that manufacturer did not support a legal finding that the manufacturer had joined the distributors' conspiracy. 6 Neither manufacturer contested the existence of the underlying conspiracy between the two distributors. 7 For simplicity, we'll refer to the distributors as A and B.

In ruling on the appeals, the Fifth Circuit Court of Appeals concluded the evidence of conspiracy to be sufficient as to JSW but insufficient as to Nucor; JSW had joined the conspiracy, Nucor had not. Prior to reaching its conclusions, the Fifth Circuit articulated the law to be applied when deciding whether a supplier has joined a conspiracy among its distributors.

Legal Standard. Because MM had not presented "direct evidence" showing the manufacturers had joined the conspiracy, 8 MM had to present sufficient evidence, at trial, on two critical aspects of the manufacturers' conduct. First, MM had to present evidence that "tends to exclude the possibility" that JSW and Nucor had acted independently in refusing to deal with MM. 9 If a manufacturer decides on its own, rather than pursuant to an understanding with others, not to deal with a distributor, the manufacturer's decision cannot be evidence of a conspiracy. 10 Conversely, a showing that a manufacturer acted contrary to its self interest can undermine a claim of independent action. 11 Second, MM had to prove the manufacturers and their alleged co-conspirators "had a conscious commitment to a common scheme designed to achieve an unlawful objective." 12 To show JSW and Nucor had committed to the distributors' scheme, each manufacturer had to know the conspiracy's "essential nature and general scope." 13 Simply stated, each manufacturer had to knowingly join the conspiracy. 14 A manufacturer's knowledge of a distributor conspiracy can be established when the conspiring distributors convey the general terms of the conspiracy to the manufacturer through threats (e.g., if you sell to X, I won't buy from you). 15 Moreover, manufacturers do not have to orchestrate a conspiracy to be liable: "parties who knowingly join an antitrust conspiracy, like any conspiracy, are liable to the same extent as other conspirators." 16

Fact Analysis. The Fifth Circuit relied on relatively few facts, in light of the applicable law, to conclude a reasonable juror could find that JSW had joined the conspiracy. The sequence of events played a critical role in the court's analysis:

  1. August 2, 2011. JSW and MM signed a 12-month supply agreement. In or around that time, JSW also provided MM a line of credit.
  2. September 8, 2011. Distributors A and B met and perfected their conspiracy, agreeing to act to prevent steel sales to MM.
  3. September 19, 2011. JSW met with distributor A. At that meeting, A told JSW that JSW had to choose between doing business with A or MM.
  4. October 4, 2011. JSW met with distributor B. At that meeting, B told JSW that JSW had to choose between doing business with B or MM.
  5. October 19, 2011. JSW contacted distributor B and asked about expanding the companies' business dealings.
  6. October 20, 2011. JSW told MM that it would not do business with MM and that JSW "understood the gravity of the situation." 17 

These facts demonstrated (1) JSW knew of the conspiracy because distributors A and B made similar threats to JSW, identifying the general terms of the conspiracy – do not deal with MM, and (2) JSW joined the conspiracy because JSW, after receiving the distributor threats, "abrupt[ly]" decided to end its relationship with MM and told MM it understood the "gravity" of its decision. 18 This conduct was sufficient to exclude the possibility that JSW had acted independently of the conspiracy. 19

  1. As for Nucor, the Fifth Circuit focused on the following facts, and again concentrated on the sequence of events:
  2. As early as 2000. Nucor sold steel to distributor B, with B becoming Nucor's largest customer by 2011.
  3. Possibly prior to September 1, 2011, but no later than September 5, 2011. Distributor B threatened Nucor, stating it should not deal with MM.
  4. September 1, 2011. MM left a voicemail telling Nucor about MM's formation and that MM hoped to sell steel to one of distributor B's customers.
  5. September 1, 2011. Nucor, "immediately" after receiving the MM voicemail, emailed distributor B pledging to continue to support B. This act was consistent with Nucor's "incumbency practice" whereby Nucor prioritized loyalty to established customers.
  6. September 2, 2011. Nucor declined to quote to MM.
  7. September 8, 2011. Distributors A and B met and perfected their conspiracy, agreeing to act to prevent steel sales to MM. 20

March 19, 2012. A third-party distributor declined to supply MM with Nucor steel because Nucor had asked that steel not be diverted to MM. The third-party also informed MM that Nucor acknowledged steel mills were being pressured not to sell to MM.

From this evidence the Fifth Circuit concluded that a reasonable juror could not exclude the possibility that Nucor acted independently of the conspiracy. First, the distributors did not reach their conspiratorial agreement until after Nucor had refused to deal with MM. Second, the evidence did not show that Nucor had been threatened or was aware of threats by distributor A. Nucor only had received a threat from distributor B. 21 Thus, it could not know that A and B were acting together. Third, Nucor's activity in March 2012, while suggestive of requisite knowledge, was insufficient to exclude the possibility of independent action because the activity also was consistent with Nucor's prior, lawful, independent decision not to sell to MM. 22

Liability for Joining Conspiracy. Beyond finding that JSW had joined the conspiracy, the Fifth Circuit also found that the anticompetitive restraint (group boycott of MM) caused by the conspiracy constituted a per se illegal restraint, rather than a restraint to be reviewed under the rule of reason. 23 This meant JSW would not be allowed to try and escape liability by presenting evidence showing its conduct was procompetitive or otherwise did not "unreasonably" restrain trade. Instead, under the per se rule, once JSW was found to have joined the conspiracy, pernicious anticompetitive effect was presumed and liability assigned. In concluding that per se liability attached to the group boycott at issue, the Fifth Circuit followed the Supreme Court's use of the per se rule in cases like Klor's. 24 Conversely, it declined to follow language from the Court's decision in Leegin, which has been argued to mean that horizontal conspiracies involving vertical relationships must be reviewed under the rule of reason. 25

Supreme Court Petition. Taking issue with the Fifth Circuit's (1) application of the per se rule and (2) finding that the evidence of distributor threats to JSW supported an inference of joinder in the conspiracy, JSW asked the Supreme Court to address whether the Fifth Circuit erred on those holdings. 26 On October 31, 2016 the Supreme Court announced it would not hear the case. 27

Lacking further guidance from the Supreme Court and given the Fifth Circuit's holding on the law and application of that law to the facts of the MM Steel case, manufacturers should assume that antitrust liability contentions can surface if they: 

  • Receive threats, similar in kind, from two or more distributors outlining a course of action that restrains trade.
  • Respond to the threats in a manner consistent with the action suggested by the threats, but inconsistent with the manufacturer's prior course of dealings, or, more generally, its independent self-interest. 28

To navigate such distributor issues, antitrust counsel can be of substantial value. As the MM Steel case demonstrates, subtle variations in manufacturer behavior and the timing of that behavior can be the difference between stepping between antitrust landmines (Nucor) and stepping on one (JSW).

Footnotes

1. MM Steel, L.P. v. JSW Steel (USA) Inc., 806 F.3d 835 (5th Cir. 2015).

2. Id. at 843. Specifically, MM alleged certain distributors conspired to induce steel manufacturers not to supply another steel distributor. The allegation differs from the refusal to deal at the heart of Aspen Skiing v. Aspen Highlands Skiing, 472 U.S. 585 (1985), a monopolization case, where a supplier refused to cooperate with its rival.

3. 15 U.S.C. § 1 (2012) ("Every contract, combination...or conspiracy, in restraint of trade...is declared to be illegal.").

4. MM Steel at 842. 

5. Id. at 842; 15 U.S.C. § 15 (2012) ("any person who shall be injured ... shall recover threefold the damages"). 

6. MM Steel at 843.

7. Id

8. In re Baby Food Antitrust Litig., 166 F.3d 112, 118 (3d Cir. 1999) ("Direct evidence in a Section 1 conspiracy must be evidence that is explicit and requires no inferences to establish the proposition or conclusion being asserted.... With direct evidence 'the fact finder is not required to make inferences to establish facts.'") (citation omitted).

9. MM Steel at 843 (quoting Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752, 764 (1984)). Note, however, that the "tends to exclude" standard does not apply at the motion to dismiss stage. See Erie County, Ohio v. Morton Salt, Inc., 702 F.3d 860, 869 (6th Cir. 2012). During a motion to dismiss, the court only must determine whether "the factual allegations ... plausibly raise an inference of unlawful agreement." Id. (citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 553 (2007)).

10. See United States v. Colgate & Co., 250 U.S. 300, 307 (1919) ("In the absence of any purpose to create or maintain a monopoly, the Sherman act does not restrict the long recognized right of trader or manufacturer engaged in an entirely private business, freely to exercise his own independent discretion as to parties with whom he will deal. And, of course, he may announce in advance the circumstances under which he will refuse to sell."). 

11. MM Steel at 843-44 (citing Viazis v. Am. Ass'n of Orthodontists, 314 F.3d 758 (5th Cir. 2002)).

12. MM Steel at 844 (quoting Monsanto, 465 U.S. at 764).

13. MM Steel at 844 (citation omitted).

14. The Second Circuit has provided an example, in a horizontal/vertical context – involving manufacturer/manufacturer and manufacturer/distributor dealings – of "knowing" versus innocent association with a conspiracy: "A horizontal conspiracy can use vertical agreements to facilitate coordination without the other parties to those vertical agreements knowing about, or agreeing to, the horizontal conspiracy's goals. For example, a cartel of manufacturers could ensure compliance with a scheme to fix prices by having every member 'require its dealers to adhere to specified resale prices.'" United States v. Apple, Inc., 791 F.3d 290, 324-25 (2d Cir. 2015) (quoting VIII Areeda & Hovenkamp Antitrust Law ¶ 1606b (3d ed. 2010)).

15. MM Steel at 844 (citing Monsanto, 465 U.S. at 763-64).

16. MM Steel at 844 (citation omitted).

17. MM Steel at 840-41, 844-45.

18. Id. at 844-45. 

19. While JSW argued that it refused to deal with MM because MM had put a hold on its steel orders, and been sued by another distributor, the Fifth Circuit ruled that a juror could have found those explanations to be pretextual. At the time of the refusal, the suit had been settled and distributors A and B already had threatened JSW. MM Steel at 845.

20. MM Steel at 841-42, 845-46.

21. MM did not allege an alternative theory of Section 1 liability based solely on the relationship between JSW and distributor B. Given the vertical nature of that singular relationship, any manufacturer/distributor's "vertical refusal to deal agreement" would have been subject to review under the rule of reason. MM Steel at 847 n.6.

22. MM Steel at 845-47.

23. Id. at 847-850. 

24. Id. at 849 ("For example, in Klor's, which remains controlling precedent, the Supreme Court applied per se liability to all of the participants in a group boycott that was arranged by only one competitor because there was a horizontal agreement among those who carried out the boycott.") (citing Klor's, Inc. v. Broadway-Hale Stores, Inc., 359 U.S. 207, 212-13 (1959)).

25. Leegin Creative Leather Products v. PSKS, Inc., 551 U.S. 877, 893 (2007). See Pet. for a Writ of Cert., JSW Steel (USA), Inc. v. MM Steel, L.P., 15-1492, at 10-15 (June 9, 2016) (citing Toledo Mack Sales & Serv., Inc. v. Mack Trucks, Inc., 530 F.3d 204, 225 (3d Cir. 2008)). But cf. Apple, 791 F.3d at 324 (finding Leegin does not "change the law governing hub-and-spoke conspiracies" because the vertical participant "has not only committed to vertical agreements but has also agreed to participate in the horizontal conspiracy.").

26. See Pet. for a Writ of Cert. (June 9, 2016).

27. Order List: 580 U.S., Cert. -- Summary Dispositions, at 3 (Oct. 31, 2016) (denying cert. in 15-1492; no explanation provided).

28. See, e.g., Toldeo Mack, 530 F.3d at 221 n.12 (manufacturer's acts, "contrary to its own stated sales policy," sufficient to "create a jury question as to whether there was an agreement between manufacturer and its dealers."); MM Steel at 843-44.

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