The hazy analytical framework for “bundling” cases has come into sharper focus, potentially making it harder for plaintiffs to prevail in certain antitrust cases. In September, a federal district court in Minnesota dismissed an antitrust claim alleging that a discount program that applied if customers purchased multiple product lines in a bundle constituted an anticompetitive pricing practice in violation of Section 2 of the Sherman Act. In doing so, the court rejected an analytical approach previously blessed by the U.S. Department of Justice, Antitrust Division, that would make it easier for plaintiffs to prove they have suffered anticompetitive injury and that would make it far more difficult for companies to determine whether their policies comply with U.S. antitrust law.
The case, Inline Packaging LLC v. Graphic Packaging International, LLC, No. 15-cv-03181-ADM-LB (D. Minn. Sept. 5, 2018), centered on a dispute between two manufacturers of susceptor food packaging, a paperboard product used to crisp and brown food in the microwave. Defendant Graphic Packaging International, LLC, sold several different paperboard and folding-carton food packaging product lines, but was allegedly the dominant susceptor product supplier, with an approximate 95 percent market share. In contrast, plaintiff Inline Packaging LLC manufactured and sold only susceptor products.
Inline claimed that it was making inroads with Graphic’s major customers and that Graphic, in response, engaged in a variety of conduct designed to thwart its upstart rival. This included offering bundled discounts across its susceptor and other paperboard product lines that made it impossible for Inline to compete on prices for the susceptor alone. Inline claimed its customers would not be willing to purchase its susceptor products and forgo the significant discounts Graphic was allegedly bundling across multiple products. Graphic moved for summary judgment on Inline’s bundling claim, arguing that there was no evidence that the bundled discounts offered in its supply contracts were unlawful.
Courts have analyzed the practice of offering packaged discounts, or “bundling,” under divergent approaches. Generally, bundling can be procompetitive because it results in lower consumer prices and other transactional benefits. But bundling can become anticompetitive if it results in the exclusion of an equally or more efficient competitor with a more limited set of products because its multiproduct rival can aggregate discounts across a wide product portfolio that the challenging competitor cannot match without selling below cost.
Courts have used different methods to determine whether a bundled discount has the potential to exclude an equally efficient rival. The Ninth Circuit, for example, has adopted the “discount attribution” test, a cost-based rule that allocates the full amount of the defendant’s bundled discount across multiple products to only the competitive product at issue.1 The bundle may be found anticompetitive if the resulting price of the competitive product needed to match the multiproduct discount is below the defendant’s incremental cost to produce it.
With no binding Eighth Circuit precedent directly on point, the parties in Inline Packaging agreed that the discount attribution standard test should guide the court’s analysis, meaning that Inline had to show that the total discounts offered by Graphic across all of its products resulted in Inline being forced to price susceptor products below incremental costs. The parties disagreed, however, as to how the test should actually be applied. Inline argued that the court should apply a variation on the discount attribution test that focused on the “contestable share” of the susceptor product market. Mem. Op. at 33. Inline’s economic expert theorized that, because Inline was a new entrant and large buyers would not move all their susceptor purchases to a new supplier, only a subset of Graphic’s susceptor sales were truly “contestable” by Inline. Id. Accordingly, Inline’s expert allocated the full amount of Graphic’s bundled discounts from multiple products to only 20 percent of Graphic’s relevant susceptor sales. In doing so, the expert asserted that each of the nine Graphic supply contracts he analyzed failed the discount attribution test. Id.
This “contestable share” variation has found support in the past from the Antitrust Division. Indeed, in making its contestable share argument, Inline relied exclusively on the competitive impact statement submitted by the Division in U.S. v. United Regional Health Care System, No. 11-00030 (N.D. Texas Feb. 25, 2011), which explained that the “contestable volume” approach should apply where “the rival producer of the competitive product cannot contest all of the monopolist’s sales of that product.” Of course, it is far likelier that prices will appear below cost when the total discount of the multiproduct bundle is applied to only a subset of relevant single product sales, making the contestable share analysis more plaintiff-friendly.
Despite the government’s support for the contestable share approach, the Inline Packaging court was unconvinced. The court noted that the competitive impact statement itself acknowledged that measuring contestable share “may in some cases be impractical” and explained that the method “is prone to error because it has the potential to condemn an overly broad category of bundled discounts that include non-predatory, above-cost discounts.” Mem. Op. at 34. Additionally, the court found that the “contestable share analysis would also add to enforcement costs by fueling litigation over the proper percentage of contestable shares.” Indeed, the court cited disputes over how Inline’s expert arrived at his 20 percent figure, seemingly troubled by how these disputes could ever be resolved with certainty. Id. at 35.
But the court’s final consideration, one it deemed perhaps the most significant, was that the contestable share approach would “chill competition by eliminating the safe harbor of the discount attribution test.” Id. at 36. Put simply, a firm would have no basis to determine what portion of its buyers’ demand is contestable to an entrant, and thus no way to determine whether a bundled discount program conformed to the antitrust laws. This could ultimately create a hesitancy among firms to engage in discounting programs that result in lower consumer prices.
The court’s rejection of the contestable share analysis was fatal to Inline’s bundling claim. Inline did not dispute that only one of Graphic’s nine challenged contracts failed the traditional discount attribution test and did not offer any analysis as to whether that contract was capable of causing anticompetitive injury on its own. As a result, the court held that “no reasonable jury could conclude that Graphic’s alleged discounted bundles resulted in harm to competition.” Id.
The decision supports the trend of adopting the discount attribution test to determine whether multiproduct bundled discounts are unlawful.
Despite the court’s rejection of the contestable share approach, the law is far from settled across jurisdictions, and a company needs to consider the range of potential outcomes and potentially applicable analyses when setting pricing strategies that cover multiple product lines, especially if the company arguably has market power as to any one product.
Business teams designing bundled discount programs should avoid written discussions of what they estimate competitive producers are able to contest, except in privileged communications with counsel examining the lawfulness of such programs.
Business teams designing bundled discount programs should include discussions of the potential savings customers could achieve under such programs.