Friday, October 26, 2007

Antitrust claim treated as board game, says judge

From the late 1980s through 2001, if you did your own body work on your car and you needed automotive sandpaper, you had two choices, 3M or NicSand. Now the only choice is 3M.

Sixth Circuit Judge Boyce F. Martin, Jr. thinks that's abrasive.

Most folks with banged-up cars let the bump shop deal with the patching and painting, and the resulting dust and stink. So, there's not a huge do-it-yourself market for automotive sandpaper.

It doesn't make economic sense for retailers to stock both brands. That's why the retailers NicSand and 3M dealt with insisted on annual, exclusive-supplier agreements. The retailers were not adverse to switching suppliers. But to get in, you had to furnish a full line of products, provide all the display equipment, discount the first order and buy the retailer's current inventory of sandpaper.

This worked extremely well for NicSand until 1997, when 3M decided to get serious about improving its one-third market share. One-by-one, over a several-year period, 3M offered the retailers six- or seven-figure incentive payments to stock 3M products on an exclusive, multi-year basis. The retailers told NicSand to come back in a few years and maybe we can talk business then.

When 3M was done, NicSand was out of the automotive sandpaper business, into bankruptcy court seeking reorganization and on the phone to its lawyers to sue 3M for antitrust violations.

The issue in the Sixth Circuit was antitrust standing. Judge Jeffery S. Sutton, writing for an en banc majority, said NicSand didn't have it because 3M's pricing was not predatory and there was no illegal tying (being forced to buy one product to get another product that you really want). The incentive payments were price cuts offered in exchange for getting the retailer's business. And the multi-year contracts? This was no different than buying in bulk to get a discount. What about the exclusive nature of the contracts? This was the retailers' condition, and 3M couldn't be faulted for going along with that.

Judge Martin, in dissent, said the case made him long for the good old days

when monopoly was an evil targeted by Congress and guarded against by the antitrust laws of the United States. Since their enactment, it has been the purpose of the federal antitrust laws to prevent the emergence of entrenched monopoly power and "to perpetuate and preserve, for its own sake and in spite of possible cost," the existence of competition in industry. ... Today, however, the majority treats monopoly more as a board game than as an economic harm to the public.
Judge Martin continued
The majority seeks to characterize this case as one in which one company that had long prospered in a particular niche market became lazy and fell victim to a more vigorous competitor that simply played the game of business more effectively. While NicSand may have once been the dominant competitor, that former status can neither legalize 3M's anticompetitive business practices nor make 3M immune from antitrust suit. Yes, NicSand was 3M's competitor, and yes, it obviously fell prey to 3M's tactics. However, 3M now holds a monopoly over the market, products have been eliminated and prices have correspondingly risen by seventy percent. The question here is whether the tactics 3M employed to attain that status were legal and whether NicSand is an adequate representative of the market's interests in this suit. Contrary to the majority's contentions, at this stage of the case [dismissal on a Rule 12(b)(6) motion with no discovery], it is impossible to conclude that NicSand has failed to meet its burden. The dangers of monopoly are well-recognized in our law ... and I believe the majority has improperly turned a blind eye to them in this case.
The case is NicSand v. 3M.

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