The Third Circuit’s 94-page opinion in antitrust case ZF Meritor, LLC v. Eaton Corp., issued on September 28, 2012, offers something for everyone in its smorgasbord of holdings concerning the law of exclusive dealing, proof of damages, and Article III standing. The opinion is most notable for rejecting the notion that above-cost prices can render an otherwise unlawful exclusive dealing agreement lawful, reinforcing the viability of de facto exclusive-dealing arrangements under Sections 1 and 2 of the Sherman Act, and ratcheting up the gatekeeper role courts play under Daubert.
Eaton Corp. has long been the leading supplier of heavy-duty truck transmissions in North America. Soon after ZF Meritor entered the market in 1999, when it looked like Eaton’s dominance might be seriously threatened, Eaton signed up each of the four truck manufacturers that purchase its transmissions to new long-term contracts. Those contracts most notably afforded the manufacturers a rebate if they purchased a certain percentage of their requirements from Eaton and obligated them to publish Eaton transmissions as the preferred option in the catalog of component choices they circulated to truck buyers. Plaintiffs sued Eaton, alleging that Eaton foisted these long-term contracts on the manufacturers by virtue of its dominant market position, which foreclosed plaintiffs from more than 90% of the market and thus forced them to exit that market by 2006. They asserted these claims under Section 1 of the Sherman Act (unlawful agreements in restraint of trade), Section 2 of the Sherman Act (unlawful action taken to maintain a monopoly), and Section 3 of the Clayton Act (illegal restrictive dealing agreements). A jury returned a complete verdict for plaintiffs, which the District Court upheld over Eaton’s motion for judgment as a matter of law. The District Court, however, awarded no damages because it excluded the testimony of plaintiffs’ damages expert, but it did enjoin Eaton from linking discounts to market penetration targets.
Affirming the District Court on the issue of liability, the Third Circuit rejected Eaton’s attempt to position the case as one in which price was the clearly predominant mechanism of exclusion. Because plaintiffs presented credible evidence that several aspects of the long-term contracts — not just the conditional rebates — were anticompetitive, Eaton’s pricing practices did not constitute the sole means of exclusion. As a result, the fact that Eaton at all times passed the “price-cost” test applicable to predatory pricing claims, by pricing its transmissions at a level above cost, was not dispositive. The Court instead applied the rule of reason to evaluate Eaton’s alleged exclusive dealing.
Applying the rule of reason, the Court determined that the probable effect of Eaton’s conduct was to substantially lessen competition in the relevant market, because the long-term contracts were de facto exclusive-dealing arrangements. It did not matter, the Court held, that there was no express exclusive-purchase requirement in the contracts because the percentage of its requirements that each manufacturer had to buy from Eaton in order to reap the benefits of its contract was so high that the contract was de facto exclusive. Nor did it matter that those percentages were less than 100% because a showing of substantial — not total — foreclosure is all that is necessary. In short, both de facto exclusive dealing and partial exclusive dealing can be unlawful, especially in a highly concentrated market where a defendant has significant market power and some degree of coercion is present.
The most eye-opening aspect of the opinion concerns damages. Despite prevailing at trial, plaintiffs got no damages because the District Court found that their expert’s damages estimates lacked sufficient indicia of reliability and thus excluded them under Daubert. The expert, however, based his estimates on figures taken from plaintiffs’ strategic business plan, which internal projections, the Third Circuit acknowledged, often serve as a legitimate basis for expert opinions. Remarkably, too, the expert knew that the business plan had been presented to the Board by experienced professionals and the Board made decisions based on the plan. Nonetheless, because he did not know how and by whom the numbers in the business plan were calculated, the Court, like the District Court, found that the numbers did not constitute good grounds for fashioning damages and thus ruled the expert’s damages calculations inadmissible under Federal Rule of Evidence 702. The Court did go on to reverse the District Court’s order denying plaintiffs leave to amend their expert report, allowing them to submit alternative estimates based on substituting into their model inputs that were included elsewhere in the report. But this does not detract from what is really a considerable expansion of the Court’s gatekeeper function under FRE 702.
Finally, for all you Article III standing aficionados, the Court vacated the injunction granted by the District Court on the ground that plaintiffs lacked standing to seek such relief, no matter how salutary it might be. The mere possibility that plaintiffs, who had exited the market a few years earlier, might one day re-enter was not sufficient to show that they were likely to suffer future injury.
In sum, if there is a single takeaway — in an opinion chock full of them — worth highlighting it is this: be sure that your damages expert knows and is able to testify to the preparations and assumptions underlying the numbers on which his/her damages estimates are based. If not, the Court, in its role as gatekeeper, may exclude such estimates as unreliable, leaving your client with something of a Pyrrhic victory.
Kevin R. Reich is an Associate in the Gibbons Business & Commercial Litigation Department.