Rival condom manufacturer's antitrust claims dismissed. Church & Dwight Co., Inc. v. Mayer Laboratories, Inc., United States District Court, Northern District of California, Case No. C-10-4429 EMC (April 12, 2012).
Church & Dwight Co., Inc. ("C&D"), the manufacturer of Trojan brand condoms filed a declaratory relief action in the district of New Jersey seeking a declaration that its marketing of condoms through the use of "planograms" and retailer inspired "category captain" programs was lawful. Defendant Mayer Laboratories, Inc. ("Mayer") counterclaimed, alleging the C&D's marketing programs violated Sections 1 and 2 of the Sherman Act, the California Cartwright Act, the Lanham Act, and California unfair competition laws, and alleging as well tort claims for interference with contracts and interference with economic relations. The action was transferred to the Northern District of California.
After three years of litigation, and voluminous discovery, C&D moved for summary judgment. Based upon an analysis of primarily Ninth Circuit law relating to exclusive dealing, the court granted the motion as to the antitrust claims, finding that Mayer had failed to present a genuine issue that C&D had abused its position as category captain for certain retailers, or had engaged in exclusionary conduct that was other than pro-competitive. While the "rubber has hit the road" as to the antitrust claims, the motion for summary judgment was denied as to the interference tort claims.
C&D manufactures and distributes "Trojan" and other brand-name condoms. Its branded sales count for 75% of all retail condom sales in the United States, although its global share is only 11%. C&D's domestic market share has steadily increased from a 67.2% figure in 2001, and has been at least 50% since 1985. The number two seller has maintained a steady share of 14-15%, while the third has a share of just under 10%. Together, the sales of the three largest competitors account for an excess of 99% of national sales. These sales have been made in three channels. The first is "food, drug and merchandise" ("FDMx"), which accounts for almost 50%. The second channel is Wal-Mart sales alone, which accounts for 33%. The remaining channel is "convenience stores" ("c-stores"), which count for almost 15%. Mayer's sales of its "Kimono" brand represent a market share of less than one-half of 1%.
The channels differ somewhat in pricing and sales structure. Drug stores, for example, carry the largest variety of condom brands, with retail prices twice as high as the mass merchandise channel. Convenience stores tend to carry only one or two brands, in three-unit packs due to limited shelf-space. Convenience stores typically seek exclusive contract bids from the manufacturers. Convenience store pricing is still higher, and may represent impulse purchases. In all channels, there is a heavy reliance on point of sale advertising. The manufacturers compete for retail space on the basis of slotting fees for each "facing" on a retailer's shelves. Manufacturers may also offer promotional packages to secure premium shelf space at eye-level. In addition, there is strong competition for promotional and ongoing placement in end-caps and side-caps.
C&D engages in "market share discount" promotions, which are the source of the principal dispute between the parties. In a "market share discount" promotion, the manufacturer offers a discount to the retailer if the retailer purchases and sells the manufacturer's products in amounts that mirror a percentage of the manufacturer's market share within the given category. For example, C&D offers "planogram rebate agreements" ("POG") to large chain retailers. A retailer is given the opportunity to receive a percentage rebate on its POG purchases. The rebate is earned by the retailer by dedicating a specified minimum percentage of available facings to C&D products. C&D instituted its POG program in 1997. The percentage rebate available has varied from a low of 55% to a high of 80%. During the course of the litigation, the 80% tier was reduced to 65%, or below C&D's market share for the FDMx channel.
C&D has served as a "category captain" for certain chains, where its assistance has been requested. In "category captain" programs, a retailer selects a manufacturer of the class of products that is being purchased, to manage stocking, shelving and placement of the goods within the "category". At all times the retailer maintained control of the ultimate shelf space placements.
In granting the motion for summary judgment on the antitrust claims, the court noted that the alleged exclusionary conduct constituted nonprice restraints, and thus subject to rule of reason analysis under Continental T.V. v. GTE Sylvania, 433 U.S. 36 (1977). This requires a showing of an adverse effect on competition in an appropriate relevant market. R.J. Reynolds Tobacco Co. v. Philip Morris, Inc., 199 F. Supp. 2d 362, 380 (M.D.N.C. 2002). The court pointed out that this requires a plaintiff to demonstrate that the defendant has market power, and that its conduct has actual anticompetitive effects within the appropriate relevant product and geographic market.
The court also concluded that Mayer had failed to carry its burden of showing a substantial foreclosure of competition in the relevant market, which the court determined to be the sale of condoms at the retail level in the United States. In making this determination, the court noted that, pursuant to the R.J. Reynolds analysis, the appropriate relevant market analysis requires an evaluation of foreclosure both at the supplier and the consumer level. See also Ansell, Inc. v. Schmid Laboratories, Inc., 757 F. Supp. 467, 475 (D.N.J. 1991).
C&D argued, and the court agreed, that there was no proper evidence that C&D could charge supra-competitive prices, or that competitors lacked the capacity to increase output in the short run, or that on the facts presented C&D had taken any steps to reduce its output. Absent this showing, there could not be any anticompetitive effects, as a matter of law.
Originally, Mayer's counterclaim had proposed a relevant market consisting of "male condoms sold to retailers". Through its expert, however, it then proposed a market definition of "all male condoms sold to retailers in the FDMx channel, excluding convenience stores. To hedge its bet, it also proposed a "submarket" of drugstores.
In rejecting Mayer's relevant market qualifications, the court found that for the purposes of the case, the key ingredient was the actions available to consumers, assuming increases in unit prices, as a result of output limitations imposed upon Mayer's own output by C&D. The court held that Mayer had produced no evidence that prices in one channel did not constrain prices in another. Mayer also failed to show that cross-elasticity of both supply and demand were equally relevant in defining a relevant market, citing Rebel Oil Co. v. Atlantic Richfield Co., 51 F.3d 1421, 1434 (9th Cir. 1995). The court also factored into its analysis that Mayer's prices were actually higher than those of C&D, while noting in addition that high prices are not equivalent to supra-competitive prices.
The court noted that Mayer had failed to establish that C&D had violated Sections 1 and 2 of the Sherman Act, and corresponding California law, by the erection of significant barriers to either new entry, or to expanded penetration by Mayer.
Finally, the court commented that C&D's consumer brand loyalty, while high in the industry, could not constitute an exclusionary barrier. Citing United States v. Syufy Enterprises, 903 F.2d 659, 669 (9th Cir. 1990), the court recognized that reputation, and the existence of good will and customer satisfaction achieved through effective service, is nothing more than competition on the merits. As stated by the court in Syufy:
[W]hen a producer deters competitors by supplying a better product at a lower price, when he eschews monopoly profits, when he operates his business so as to meet consumer demand and increase consumer satisfaction, the goals of competition are served, even if no actual competitors see fit to enter the market at a particular time.
We make it clear today, if it was not before, that an efficient, vigorous, aggressive competitor is not the villain antitrust laws are aimed at eliminating. . . . We fail to see how the existence of good will achieved through efficient service is an impediment to, rather than the natural result of competition.
Id. at 668-669 (citing United States v. Waste Mgmt., Inc., 743 F.2d 976, 984 (2d Cir. 1984)).
But here is where the rubber really hits the road. Borrowing from the analysis in Reynolds and Rebel Oil, the Court noted that at no time did C&D offer a planogram that was not subject to acceptance or rejection by the retailer. Significantly, the market share allegedly foreclosed only once exceeded the historic market share then enjoyed by C&D, based upon consumer preference and acceptance. It noted that in no situation was a retailer required to accept the market share discount, and at no time was it threatened with a reduction in its volition to determine, on its own, the offerings and placement of the products that it was offering from sale.
While not cited by the court, the fact that the planogram market share rebate and category captain programs were strictly volitional to the retailers distinguishes United States v. Dentsply Intern., Inc., 339 F.3d 181 (3rd Cir. 2005). In Dentsply, the Third Circuit found that use of short term requirements contracts were nevertheless unlawful exclusionary where Dentsply's exclusives were coupled with a threat of termination of all future dealings, absent acceptance of the terms as offered.
The court's grant of summary judgment as to the antitrust and competition claims is also consistent with the Ninth Circuit law based upon Omega Environmental, Inc. v. Gilbarco, Inc., 127 F.3d 1157 (9th Cir. 1997), and its more recent decision in Allied Orthopedic v. Tyco Health Care Group, 592 F.3d 991 (9th Cir. 2010). Short term, volitional exclusivity programs do not unlawfully foreclose competition. They promote, and do not impede competition on the merits.