This past November, in MM Steel, L.P. v. JSW Steel (USA) Inc.,[1] the Fifth Circuit reviewed a lower court decision in which a jury found that two steel manufacturers unlawfully participated in a group boycott organized by two of their steel distributor customers that allegedly targeted a newly formed competing distributor. The Fifth Circuit concluded that one of the manufacturers, Nucor Corporation (“Nucor”), had acted independently in deciding not to do business with the distributor, but that the other, JSW Steel (USA), Inc. (“JSW”), had joined the rival distributors’ boycott. The Fifth Circuit further held that the group boycott constituted a per se violation of Section 1 of the Sherman Act, meaning there was no need to analyze whether the boycott had an anticompetitive effect. As a result, the court upheld a damages award against JSW that the district court had trebled to over $150 million.

Background

The plaintiff, MM Steel, L.P. (“MM”), was a newly formed steel distributor created by two experienced steel salesmen who had previously worked for two other steel distributors, American Alloy (“AmAlloy”) and, later, Chapel Steel Corp (“Chapel”). MM signed an agreement with JSW under which it would supply MM with a certain amount of steel each month and extend MM a $1.5 million line of credit.

Executives of both AmAlloy and Chapel, apparently upset that they would be facing new competition, discussed ways to “go[] after” MM, their new competitor.[2] Chapel’s president eventually informed the president of AmAlloy that Chapel would “notify[] any [steel] mill that is selling [to MM], that they can no longer expect any future business from Chapel.”[3] Soon thereafter, AmAlloy’s president met with JSW executives and told them that they would have to choose between supplying steel to MM or to AmAlloy. Approximately two weeks later, Chapel’s president met with JSW executives and gave them the same ultimatum—distribute to MM or to Chapel, but not to both. JSW thereafter informed MM that while it “understood the gravity of the situation,” it was terminating their agreement and would no longer supply steel to MM. [4] JSW informed Chapel that it had terminated its agreement with MM and asked if it could “step up business” with Chapel.[5]

In addition to their failed arrangement with JSW, the salesmen who founded MM attempted to form a relationship with Nucor, another steel manufacturer. Nucor provided Chapel, its largest customer, with 75 percent of Chapel’s steel requirements. Shortly after being contacted by MM, the president of Nucor sent an email to Chapel’s president pledging its continued support to Chapel. Nucor also informed its employees that it would not offer a price quote to MM, but would instead “continue to support [its] existing customers.”[6]

Having failed to secure a contract with Nucor, MM instead began purchasing steel from North Shore Steel—a distributor that received its steel from Nucor. Nucor informed North Shore that the arrangement with MM was not acceptable because it interfered with Nucor’s practice of avoiding conflicts with its current clients.[7] Based on this notice from Nucor, North Shore met with MM to terminate their supply arrangement. MM secretly recorded the meeting, which included a statement by a North Shore executive that “there’s a lot of pressure on the mills to not support [MM] from their biggest customers,” and that “[t]here’s a mandate at Nucor that’s against supporting . . . MM Steel.”[8]

MM went out of business shortly thereafter. It then filed suit against Chapel, AmAlloy, AmAlloy’s president, and a third distributor, as well as JSW and Nucor, alleging that they had formed a per se unlawful group boycott against MM in violation of Section 1 of the Sherman Act.[9] The court allowed MM’s claim to proceed to trial under a per se theory of liability, and the jury found that Chapel, AmAlloy, and the other distributor had “conspire[d] to persuade, induce, or coerce any steel mill not to sell steel plate to MM.”[10]The jury also found that the two steel manufacturers, JSW and Nucor, had “knowingly join[ed] the conspiracy.”[11] The jury awarded MM damages of $52 million, which the district court trebled. The defendants appealed the decision, and while the jury’s decision was on appeal, Chapel, AmAlloy, AmAlloy’s president, and the third distributor all settled with MM, leaving JSW and Nucor as the remaining defendants before the Fifth Circuit.

The Fifth Circuit Decision

The boycott evidence. The Fifth Circuit reviewed the jury’s findings to determine whether there was substantial evidence showing that JSW and Nucor, the steel manufacturer defendants who appealed, had joined an existing horizontal agreement between the two distributors, Chapel and AmAlloy, to boycott MM. The two manufacturer defendants did not dispute the existence of the distributors’ horizontal agreement, only that they did not join that conspiracy. In order to establish liability, MM needed to have presented evidence “that tend[ed] to exclude the possibility” that JSW and Nucor acted independently in deciding not to do business with MM.[12] MM also needed to establish that JSW and Nucor were aware of the illegal nature of the group boycott when they joined it.[13]

In analyzing JSW’s conduct under these standards, the court emphasized the serious relationship that JSW established with MM by signing a supply contract and extending MM a line of credit.[14] Then, after meetings and threats from both AmAlloy and Chapel within a couple of weeks of each other, JSW terminated that relationship and acknowledged the “gravity” of doing so. While JSW claimed that it terminated its relationship with MM because MM’s founders were embroiled in a non-compete lawsuit with Chapel, the court determined that a jury could find that reasoning to be pretextual because that lawsuit had been settled by the time JSW broke off its relationship with MM.[15] The Fifth Circuit panel also noted the significant fact that JSW could have faced a breach of contract suit by ending its agreement with MM.[16] The court ruled that those factors were sufficient to uphold the jury’s finding that JSW joined the distributors’ group boycott.[17]

Regarding Nucor, on the other hand, the Fifth Circuit concluded that the jury’s finding of an agreement was not supported by substantial evidence. Nucor presented evidence that under its previously established “incumbency practice,” it would not accept new business that threatened existing business.[18] Additionally, even if Nucor’s refusals had not been strictly independent, but had been pursuant to a vertical agreement with Chapel, MM had not presented any evidence that Nucor was aware of the agreement between AmAlloy and Chapel when Nucor refused to quote MM, meaning that Nucor could not have knowingly joined an existing horizontal agreement between the two distributors.[19] The Fifth Circuit added that the recorded comment by North Shore’s executive about the “mandate” at Nucor against supporting MM was not significant because it came months after Nucor refused to deal with MM, and Nucor’s refusal to deal with MM had been “unwavering” before it could have known about any agreement between the two distributors.[20] Therefore, the Fifth Circuit held, even though Nucor’s refusal to deal with MM may have been “consistent with” the conspiracy, MM had not presented evidence tending to exclude the possibility that the refusal was made independently of the conspiracy.[21]  

The per se illegality ruling. Despite the conclusion that JSW had entered into a “hub and spoke” conspiracy with the two distributors, JSW argued that the district court should have evaluated its conduct under the rule of reason, which would allow JSW to show that the agreement was not unreasonable because it did not harm competition in the steel industry. The Fifth Circuit disagreed. It relied on a number of Supreme Court precedents involving so-called “hub and spoke” agreements in finding that the per se rule applied to the group boycott that JSW joined.[22] The court reasoned that such boycotts were per se unreasonable because “the likelihood of anticompetitive effects is clear and the possibility of countervailing procompetitive effects is remote.”[23] In so holding, the Fifth Circuit distinguished the Supreme Court’s 2007 decision in Leegin Creative Leather Prods., Inc. v. PSKS, Inc.,[24] on the ground that it involved vertical agreements, which generally are reviewed under the rule of reason because they have some procompetitive justifications.[25] The court contrasted such arrangements with the way in which the two distributers used their vertical agreements with JSW as part of a horizontal group boycott.[26]

Significance of the Fifth Circuit’s Decision

The Fifth Circuit’s MM Steel decision is notable both for its conclusion that a supplier can join an illegal “hub and spoke” conspiracy by refusing to deal with a different distributor in response to the co-conspirators’ demands, and that a supplier’s participation in such a group boycott is subject to per se liability under the Sherman Act. While the court did not explain exactly what conduct will permit a jury to conclude that a supplier has joined a horizontal conspiracy among its distributors or dealers, the case did provide some important lessons to suppliers. First, a supplier should exercise caution when terminating an existing relationship with a distributor or dealer after pressure to do so by its competitors. It should indicate clearly in advance that it is acting independently, and if it does decide to terminate the relationship, it should inform the customer being terminated that it is in fact doing so independently. The manufacturer also should not report its actions to the complaining distributors or dealers. It should avoid any appearance that it is doing so as a result of the outside pressure.

The court’s decision to apply the per se rule to the group boycott—based upon well-established Supreme Court law—is also significant at a time when antitrust defendants argue that the Supreme Court is moving away from the application of the per se rule.

JSW has challenged the panel’s decision in a petition for rehearing en banc, arguing that both the determination that JSW joined a horizontal agreement and the application of the per se rule to JSW were inconsistent with several Supreme Court and circuit court decisions.[27] No decision on the petition has yet been reached. The Fifth Circuit’s MM Steel  decision as it now stands, however, provides valuable guidance to a distributor or dealer who has evidence that it has been the victim of a group boycott.