Wednesday, December 29, 2010, 9:29 AM

Twombly Plus Leegin Equals Dismissal of Price Fixing Claims By Eleventh Circuit

On December 2, 2010, the Eleventh Circuit affirmed the dismissal of vertical and horizontal price fixing claims against Tempur-Pedic Intern., Inc. based on plaintiff's failure to allege a plausible relevant product market or horizontal conspiracy. See Jacobs v. Tempur-Pedic Intern., Inc., --- F.3d ---, 2010 WL 4880864 (11th Cir. 2010). The Eleventh Circuit's decision was based on the Supreme Court's rulings in Leegin that vertical price fixing was not per se illegal and Twombly which raised the bar for pleading a cause of action in federal court. Neither of these cases had been decided when plaintiff originally filed its complaint against Temper-Pedic in January 2007. At that time, vertical price fixing was per se illegal and a complaint alleging a horizontal conspiracy did not need to contain detailed facts to overcome a motion to dismiss. The Eleventh Circuit's decision in Jacobs demonstrates how powerful of a shield Twombly and Leegin can be for antitrust defendants in federal court. The dissenting opinion, however, argues that the majority went too far in applying Twombly and Leegin.

Background

Tempur-Pedic manufactures 80-90% of the visco-elastic foam mattresses sold in the United States. Tempu-Pedic sells its mattresses through distributors and directly to consumers through its own website. Tempur-Pedic sets the minimum retail price its distributors can charge, and it adheres to those minimum prices when selling mattresses through its own website.

Plaintiff, a consumer who purchased a Tempur-Pedic mattress, alleges that Tempur-Pedic's enforcement of retail price maintenance agreements with its distributors constitute unlawful vertical price fixing. Plaintiff also alleges that, when selling mattresses directly to consumers via its website, Tempur Pedic is acting as a distributor, and thus its agreement/conspiracy to set prices with other distributors constitutes horizontal price fixing which is per se unlawful.

The Vertical Price Fixing Claim

The majority recognized that Plaintiff's vertical price fixing claim was governed by the rule of reason. (There was no discussion about whether a quick-look analysis or some other truncated analysis should govern the vertical price fixing claims). The majority dismissed the vertical price fixing claim because Plaintiff had not properly alleged that visco-elastic foam mattresses constitute a separate and district relevant submarket from mattresses generally. The crux of this holding is that, under Twombly, an antitrust plaintiff must plead detailed facts "'plausibly suggesting' the relevant submarket's composition." The court explained:

Jacobs's skimpy allegations of the relevant submarket do not meet this obligation. The complaint alleges, without elaboration, that “[v]isco-elastic foam mattresses comprise a relevant product market, or sub-market, separate and distinct from the market for mattresses generally, under the federal antitrust laws.” This conclusional statement merely begs the question of what, exactly, makes foam mattresses comprise this submarket. The complaint provides no factual allegations of the cross-elasticity of demand or other indications of price sensitivity that would indicate whether consumers treat visco-elastic foam mattresses differently than they do mattresses in general. Consumer preferences for visco-elastic foam mattresses versus traditional innerspring mattresses, and the costs associated with their sale, may vary widely, may vary little, or may not vary at all. Jacobs's complaint, however, gives no indication of which of these is the case. The allegations that visco-elastic foam mattresses are more expensive than traditional innerspring mattresses and that visco-elastic foam mattresses have “unique attributes” are similarly of little help. They do not indicate the degree to which consumers prefer visco-elastic foam mattresses to traditional mattresses because of these unique attributes and differences in price. Would, for example, a consumer whose innerspring mattress was due for replacement be more likely to purchase another innerspring mattress or substitute a visco-elastic foam model for it? Are visco-elastic foam mattresses put to different uses (as luxury goods, such as in fine hotels and within higher income brackets) than are traditional mattresses? These types of questions, which our precedent makes clear are crucial to understanding whether a separate market exists, go unanswered in the complaint.

Moreover, 'the broader economic significance of a submarket must be supported by demonstrable empirical evidence.'... While we acknowledge that Jacobs did not have the chance to undertake extensive discovery because this case was dismissed on a Rule 12(b)(6) motion, he nevertheless had the obligation under Twombly to indicate that he could provide evidence plausibly suggesting the definition of the alleged submarket. Such an indication is conspicuously lacking here; in its place is the unsupported assertion that visco-elastic foam mattresses constitute a distinct submarket of the larger mattress market.


The dissenting opinion, on the other hand, argues that "the majority goes too far when it interprets Twombly to require a plaintiff to include actual evidence in the complaint" and the majority's "demand for 'empirical evidence' at this stage of litigation is improper." According to the dissent, "[p]roduct market analysis is detailed and complicated" and "simply cannot be determined on a motion to dismiss." Therefore, the dissent would have accepted as true Plaintiff's "bald" factual allegation that foam mattresses constitute a distinct and relevant submarket without requiring additional facts regarding the "cross-elasticity of demand" for mattresses generally.

(The majority also held that plaintiff failed to allege anticompetitive effects, but this ruling largely flows from the ruling that plaintiff failed to allege that foam mattresses were a separate relevant market because, given Tempur-Pedic's 80-90% market share, it would have had market power if the market was limited to foam mattresses.)

The Horizontal Price Fixing Claim

Plaintiff's horizontal price fixing claim was based on the theory that Tempur-Pedic, acting as a distributor when selling mattresses directly to consumers through its website, entered into a horizontal price fixing agreement with its distributors. Unlike vertical price fixing, horizontal price fixing is per se illegal and, therefore, there is no need to allege or prove a relevant product market. The district court dismissed the horizontal price fixing theory because (1) courts generally treat dual distribution models (i.e. when manufacturers also compete against their distributors by selling directly to consumers) as vertical rather than horizontal in nature; and (2) Plaintiff did not allege a freestanding horizontal agreement among Tempur-Pedic, as a distributor, and its distributors.

The majority noted that the Eleventh Circuit has not established a bright-line rule that all dual distribution models are vertical rather than horizontal. Therefore, the majority based its ruling on the second rationale. In so doing, the majority again applied Twombly and concluded that Plaintiff's allegation that Tempur-Pedic (acting as a distributor) tacitly colluded with its distributors to fix prices was not plausible because it was just as likely that Tempur-Pedic and its distributors were independently acting in their own economic self-interest. (The majority's economic analysis heavily relies on the fact that Tempur-Pedic was a manufacturer and a distributor; therefore, the majority seems to conflate the two rationales articulated by the district court).

Again the dissent argues that the majority's opinion goes too far, explaining:
My judicial experience and common sense leads me to conclude that it is entirely plausible that TPX and its distributors colluded to set prices. Indeed, it is totally implausible that TPX and its distributors set prices independently of each other. Horizontal price-fixing is still a per se violation, and this allegation satisfies the plausibility pleading standard: it is entirely plausible that this uniformity in pricing is the result of collusion rather than market forces. Jacobs has a colorable horizontal price fixing claim, and his horizontal price-fixing claim should have been allowed to proceed.

Conclusion

As a whole, the Eleventh Circuit's decision demonstrates how different judges can come to very different conclusions regarding the "plausibility" of a plaintiff's allegations of conspiracy and relevant market. The majority's opinion shows how difficult a hurdle Twombly and Leegin can be for a price fixing claim. On the other hand, the dissent's opinion shows that application of Twombly and Leegin can differ wildly from judge to judge. Therefore, manufacturers should not take too much comfort in the majority's analysis. Additionally, this case only involved price fixing claims under the Sherman Act. As noted elsewhere in this blog, state law may impose more stringent prohibitions on price fixing than federal law.

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