The Fifth Circuit Court of Appeals upheld a $156 million jury verdict against a U.S. Gulf Coast steel manufacturer accused of conspiring with distributors to "boycott" a new distributor by denying it access to steel. Even though the steel manufacturer was responding to pressure from distributors, this was sufficient to support the verdict of refusing to sell to the new entrant. This is a reminder for any company to exercise caution when its conduct might be seen as coordinated with other market participants.
The defendant manufacturer, for simplicity here called "Manufacturer 1," refused to sell to a newly-formed distributor, "NewCo," after other distributors threatened not to buy from Manufacturer 1 if it did business with the new competitor. The court found substantial evidence that Manufacturer 1 knowingly joined a "group boycott" conspiracy among those competing steel distributors to cut off NewCo's access to steel product. However, the court reversed a verdict against a second steel manufacturer because there was not substantial evidence that Manufacturer 2 had joined the conspiracy.
The jury found Manufacturer 1's conduct unlawful under Sherman Act § 1, using the "per se" rule that applies to those types of agreements that always or almost always are anticompetitive. The court also affirmed the NewCo's $52 million in damages for lost profits, automatically trebled to $156 million under the antitrust laws.
NewCo was founded in 2011 by two employees of rival steel distributors. NewCo and Manufacturer 1 signed a supply agreement and line of credit. Responding to the new competition, NewCo's distributor competitors discussed how to counter NewCo:
- Distributor A: We should "do all we can to help [Distributor B] in going after [NewCo]"
- Distributor B's president to salesman: "If you don't have any steel, you can't sell any steel."
- In a meeting with Distributor B, Distributor A's president: "Don't worry, we're going to get [NewCo]."
- Distributor B's CEO: We will take "all available courses of action, legally and otherwise, including notifying any mill that is selling [to NewCo], that they can no longer expect any future business from [us]."
- The distributors each had separate discussions with Manufacturer 1. Distributor A to Manufacturer 1: "The choice was to do business with [us] or to do business with NewCo." Distributor B gave both manufacturers a similar choice.
Both manufacturers declined to sell to NewCo, which closed in 2013. NewCo then sued both the manufacturers and the distributors, alleging a per se illegal group boycott in violation of the Sherman Act. The distributor defendants settled, and at trial the jury found that both manufacturers had knowingly participated in the distributors' conspiracy to exclude NewCo.
The Fifth Circuit affirmed the jury's finding against Manufacturer 1. But the court concluded there was not enough evidence to show Manufacturer 2 had coordinated with the distributors rather than independently had decided to refuse to sell to NewCo.
The small-but-critical difference between the facts against the two manufacturers highlights the antitrust risks in responding to complaints from customers:
First, even though they were responding to pressure from distributors, the manufacturers faced antitrust risk when they decided not to sell to the new entrant. The distributors had formed a conspiracy to "boycott" NewCo by trying to cut off its supply. A manufacturer can be liable if it agrees to participate in a customer boycott (that is, joins the conspiracy), as opposed to acting independent of the conspiracy.
Second, the appeals court upheld the jury finding against Manufacturer 1 because there was "substantial evidence for the jury to conclude" that it had joined the conspiracy. The facts showed that Manufacturer 1 had agreed to supply NewCo but then reversed that decision after being pressured by the incumbent distributors. Manufacturer 1 did not just respond to complaints from the distributors, but was aware of the conspiracy and acted in response to the distributors' threats against Manufacturer 1. Having joined the conspiracy, even though not a leader of the conspiracy, Manufacturer 1 was jointly and severally liable for any harm caused by the boycott.
Third, in contrast, the court rejected the finding against Manufacturer 2, which had declined to sell to NewCo before it could have known of the other distributors' agreement to exclude NewCo. Manufacturer 2 asserted it had an "incumbency practice" to support established distributor customers. Although Manufacturer 2 had acted in a way that was consistent with the purposes of the group boycott, the evidence against it was as consistent with its acting independently.
Finally, the court rejected the argument that the boycott claim required proof of actual competitive harm under the "rule of reason." It upheld use of the per se rule, which also covers price fixing and other conduct is inherently anticompetitive. The court held that the per se rule applies to horizontal conspiracies (like this one between the incumbent distributors) to cause "suppliers or customers to deny relationships the competitors [like NewCo] need in the competitive struggle."
This case highlights how a supplier can be put at antitrust risk by customers using it for their own anticompetitive purposes. Manufacturer 1's choice not to sell to NewCo may seem rational, rejecting new business in response to complaints by existing customers. But the fact that this manufacturer responded to threats from more than one distributor, within weeks of each other, was sufficient for the jury to conclude that the manufacturer was aware of and had become a willing participant in a conspiracy among the distributors to exclude the new distributor. Company personnel given reason to suspect there may be an anticompetitive agreement among other market participants should immediately and unambiguously reject any suggestion they will cooperate and inform their legal counsel of the situation as soon as possible.
As so often is the case, this lawsuit also should remind companies of the need for caution and restraint in what they say and write in documents. "Hot" documents and communications, like those quoted above, were central to proving the existence of the boycott agreement between the distributors.
The Fifth Circuit's November 25, 2015, opinion in MM Steel v. JSW Steel and Nucor can be found here.