Friday, June 20, 2008, 9:10 AM

Mack Trucks: Third Circuit Reverses Summary Judgment In Price Fixing Claim Under Rule Of Reason, Applying Leegin

On June 17, 2008, the Third Circuit issued a precedential decision applying the rule of reason to an alleged price fixing conspiracy between a manufacturer of heavy duty trucks and its dealers. See Toledo Mack Sales & Service, Inc. v. Mack Trucks, Inc., --- F.3d --- (3d Cir. 2008). This is one of the first decisions from the Court of Appeals after the Supreme Court's decision in Leegin Creative Leather Prods., Inc. v. PSK, Inc., 127 S. Ct. 2705 (2007). The case demonstrates that price-fixing claims may survive summary judgment, under the rule of reason, if the plaintiff can present evidence that the defendant manufacturer had "market power" and that the dealers/retailers (rather than the manufacturer) were the source of the alleged restraint.

Summary of Toledo Mack Sales & Service

Defendant Mack Trucks manufactured heavy-duty trucks and sold them to dealers across the country for resale. An important aspect of the price of a Mack truck is the transition-specific discount ("sales assistance") that Mack provides to the dealer. The larger the sales assistance, the less the dealer can charge the customer.

Each dealer was given an assigned "Area of Resonsibility" ("AOR"). Although a dealer's AOR was not exclusive (i.e. dealers were free to sell anywhere), Mack adopted an official policy denying sales assistance to out-of-AOR sales. Additionally, plaintiff alleged that this official policy (and unofficial policy of discouraging price competition among dealers) was taken at the bequest of dealers and in aid of the "gentelman's agreement" among dealers not to compete against each other.

Plaintiff was a Mack truck dealer who aggressively competed against other Mack truck dealers. Plaintiff sued Mack claiming that the official policy of denying sales assistance for out-of-AOR sales (and unofficial policy of discouraging price competition among its dealers) was part of an unlawful conspiracy to restrain trade under the Sherman Act and price discrimination under the Robinson Patman Act. The district court granted defendant summary judgment based on the Supreme Court's recent decision in Leegin that price fixing agreements were not per se illegal. The Third Circuit, however, reversed and held that plaintiff produced sufficient evidence under the rule of reason to survive summary judgment.

The Court found that there was evidence of a horizontal agreement among Mack dealers to control prices which would be per se unlawful under the Sherman Act. The Court also found there was evidence of a competition-reducing vertical agreement between Mack and its dealers including Mack's official policy not to provide sales assistance for out-of-AOR sales. The vertical agreements between Mack and its dealers, however, were not per se illegal (after Leegin) even if they supported the illegal horizontal agreements among the dealers. Citing Leegin, the Court held that the rule of reason would apply to a vertical agreement entered upon to facilitate a horizontal cartel among competing retailers.

In determining whether such an agreement was unreasonable under the rule of reason, the Court applied the following four factors that it had previously identified as relevant in a rule of reason case:

"(1) that the defendants contracted, combined or conspired among each other; (2) that the combination or conspiracy produced adverse, anti-competitive effects within the relevant product and geographic markets; (3) that the objects of and the conduct pursuant to that contract or conspiracy were illegal; and (4) that the plaintiffs were injured as a proximate result of that conspiracy."

The Court then identified two additional factors from the Supreme Court's decision in Leegin: (1) whether the source or impetus of the restrain was from the retailers/dealers or from the manufacturer; and (2) whether the manufacturer had market power. Applying these factors, the Court concluded that plaintiff's allegations created jury questions under the rule of reason. First, the Court noted there was evidence that the dealers were the impetus of Mack's policy not to provide sales assistance for out-of-AOR sales and that this policy furthered the dealer's horizontal agreement not to compete on price. Second, the Court noted that plaintiff presented expert testimony that Mack possessed market power in two relevant product and geographic markets for heavy-duty trucks, which in turn, was sufficient evidence that the alleged agreement had anticompetitive effects.

The Court, therefore, reversed the district court's summary judgment ruling and directed that plaintiff's Sherman Act claim be heard by a jury. The Court, however, affirmed dismissal of the Robinson Patman claims because the RPA does not apply in the context of a single sale of a customized good via a competitive bidding process. (In order for there to be price discrimination under the RPA, there must be actual sales at two different prices to two different buyers. Because no sale of a Mack truck took place until after the customer accepts a dealer's bid, the amount of sales assistance Mack provides to a particular dealer is part of an offer to sell -- not a sale. See also Volvo Trucks North America, Inc. v. Reeder-Simco GMC, Inc., 546 U.S. 164 (2006)).

Analysis

Toledo Mack Sales & Service demonstrates that price fixing cases can survive summary judgment even after the Supreme Court's decision in Leegin. A manufacturer (especially one that might have market power in a relevant market) should be careful that its policies and agreements with its dealers do not appear to be in aid of an illegal agreement among its dealers not to compete against each other. As demonstrated in Toledo Mack Sales & Services, a manufacturer that gets caught up in the illegal agreement between its dealers may be liable to a dissatisfied dealer (or at least have to defend itself in a jury trial).

For more information about price fixing after Leegin see this powerpoint presentation.

For a copy of the Third Circuit's decision in Toledo Mack Sales & Service, click here.

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