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Overturning a $68 million verdict, a divided federal appeals court ruled Monday that office supply giant 3M did not violate antitrust laws in its competitive efforts in the market for transparent tape because it never priced its products below cost. But a dissenting judge complained the ruling would “weaken Section 2 of the Sherman Act to the point of impotence,” and that her colleagues were imposing new hurdles for antitrust plaintiffs that will harm competition. In the suit, Ontario, Canada-based LePage’s Inc. claimed that St. Paul, Minn.-based 3M — the maker of “Scotch” brand tape and Post-It notes — set out to drive LePage’s out of business by offering “bundled” rebates to large retailers that could be earned only by removing LePage’s products from their shelves. As a result, LePage’s said it lost some of its biggest customers, such as the office supply chain Staples, which canceled its contract with LePage’s to manufacture a store-brand tape in order to benefit from 3M’s rebate program. In April 1999, a jury found that 3M abused its monopoly power, but cleared 3M on claims that it had engaged in exclusive dealing or unreasonably restrained trade. Technically, the jury awarded LePage’s $22.8 million in damages, but that figure was automatically trebled for a total verdict of $68.4 million. In March 2000, U.S. District Judge John R. Padova of the U.S. District Court for the Eastern District of Pennsylvania upheld the verdict after finding that the jury was properly instructed, that LePage’s made out each of the essential elements of its monopoly claim, and that the jury had sufficient evidence to support its verdict. Now the 3rd U.S. Circuit Court of Appeals has overturned the entire verdict and ordered that judgment be entered in favor of 3M. Senior 3rd Circuit Judge Morton I. Greenberg found that LePage’s never proved that 3M engaged in any illegal conduct. “It is difficult to see how consumers are better off if bundled rebates are illegal regardless of how competition is affected,” Greenberg wrote in an opinion joined by 3rd Circuit Judge Samuel A. Alito. Greenberg found that LePage’s evidence was missing its linchpin because it never proved that 3M’s pricing was below cost or that LePage’s itself would have had to price below cost to compete. “We cannot overlook the lack of evidence to prove that pricing was what caused the drop in LePage’s market share. Simply pointing to an expert to support the contention that the company would have gone out of business, without providing even the most basic pricing information, is insufficient,” Greenberg wrote. “Without such pricing information, it is difficult even to begin to estimate how much of the market share LePage’s lost was due to 3M’s bundled rebates,” Greenberg wrote. By failing to show how much it would have to lower its prices before it would be driven out of business, Greenberg found that LePage’s was effectively arguing that “the linkage of a monopoly product with a competitive one … is the significant factor to be considered rather than the pricing.” He also faulted LePage’s for insisting that it was not bringing a predatory pricing claim despite alleging that some of 3M’s actions were predatory. If courts allowed such a claim, Greenberg said, it could easily be abused by competitors who were simply unwilling to compete. “If the mere act of offering a bundled rebate can be condemned under Section 2 of the Sherman Act without regard for the relative efficiency or cost structure of the competitor, then competitors unwilling to accept lower profits could use the law to insulate themselves from competition,” Greenberg wrote. “For example, a competitor who would have to lower its prices by 1 percent in order to match a bundled rebate could file suit against the alleged monopolist and obtain relief merely because it does not want to accept lower profits.” LePage’s lawyer, Barbara W. Mather of Philadelphia-based Pepper Hamilton, argued that the case fell squarely within the 3rd Circuit’s 1978 decision in SmithKline Corp. v. Eli Lilly & Co., which, she said, held that courts can find that a company willfully has acquired and maintained monopoly power if it links a product on which it does not face competition with a product on which it faces competition. But Greenberg said LePage’s case was distinguishable from SmithKline. “We agree with 3M that LePage’s simply did not establish that 3M’s conduct was illegal, as LePage’s did not demonstrate that 3M’s pricing was below cost and, in the absence of such proof, the record does not supply a basis on which we can uphold the judgment,” Greenberg wrote. In SmithKline, the defendant, Eli Lilly & Co., had two drug products, Keflin and Keflex, on which it faced no competition, and one product, Kefzol, on which it faced competition from SmithKline’s product, Ancef. Lilly offered a higher rebate of 3 percent to companies that purchased specified quantities of any three (which, practically speaking, meant combined purchases of Kefzol, Keflin and Keflex) of Lilly’s cephalosporin products. The 3rd Circuit found an antitrust violation, saying “although hospitals were free to purchase SmithKline’s Ancef with their Keflin and Keflex orders with Lilly, thus avoiding the penalties of a tie-in sale, the practical effect of that decision would be to deny the Ancef purchaser the 3 percent bonus rebate on all its cephalosporin products.” But Greenberg found that SmithKline had proven an element of its case that LePage’s neglected. “Because of Lilly’s volume advantage, to offer a rebate of the same net dollar amount as Lilly’s, SmithKline would have had to offer companies rebates ranging from 16 percent for average size hospitals to 35 percent for larger volume hospitals for their purchase of Ancef,” Greenberg wrote. As a result, he said, the 3rd Circuit concluded that Lilly willfully acquired and maintained monopoly power by linking products on which Lilly faced no competition (Keflin and Keflex) with a competitive product, resulting in the sale of all three products on a non-competitive basis in what otherwise would have been a competitive market between Ancef and Kefzol. LePage’s, he said, was arguing that it did not have to show that 3M’s package discounts could prevent an equally efficient firm from matching or beating 3M’s package discounts. Greenberg found that 3M’s pricing structure and bundled rebates “were not necessarily contrary to its economic interests, as they likely increased its sales.” In addition to increasing bulk sales, market share and customer loyalty, Greenberg said, “there are several other potential ‘procompetitive’ or valid business reasons for 3M’s pricing structure and bundled rebates: efficiency in having single invoices, single shipments and uniform pricing programs for various products.” And the evidence, Greenberg said, showed that, with the biggest customers, 3M’s rebates did not eliminate the competitive process, because LePage’s still was able to retain some customers through negotiation, and even though it lost other customers, the losses were attributable to their switching to foreign suppliers or changing suppliers because of quality or service without regard to the rebates. If the courts allowed LePage’s to win a judgment and injunctive relief on the basis of the bundled rebates, Greenberg said, “we would risk curtailing price competition and a method of pricing beneficial to customers because the bundled rebates effectively lowered their costs.” In a spirited dissent, 3rd Circuit Judge Dolores K. Sloviter said Greenberg’s reasoning would weaken antitrust laws by allowing admitted monopolists to engage in conduct that, when viewed in its totality, has anticompetitive effects. “While that may be a consummation greatly to be desired by the behemoths of industry, such as Microsoft or 3M, it would be an incalculable loss to business generally and to the consumer,” Sloviter wrote. Sloviter said � 2 of the Sherman Act was “designed to curb the excesses of monopolists and near-monopolists” and is “the equivalent in our economic sphere of the guarantees of free and unhampered elections in the political sphere.” While democracy can thrive only in a free political system, she said, “so also can market capitalism survive only if those with market power are kept in check.” Sloviter said Greenberg erred by “failing to consider the synergistic effect of 3M’s conduct taken as a whole.” She also complained that Greenberg had ignored the jury verdict and failed to recognize that the court’s review of a jury’s findings “is limited to determining whether some evidence in the record supports the jury’s verdict.” But Greenberg’s fatal flaw, she said, was his reliance on the U.S. Supreme Court’s 1993 decision in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp. In the appeal, Sloviter said, 3M argued that under Brooke Group, its conduct was legal as a matter of law because it never priced its transparent tape below its cost. The majority, she said, agreed with the argument. “But Brooke Group did not deal with a monopolist and the antitrust claim in that case was predatory pricing, which is not one that LePage’s raised here,” Sloviter said. Sloviter also complained that Greenberg discussed bundled rebates and exclusive dealing separately. “I view that as a serious error. That is because in determining whether a monopolist competes on some basis other than the merits, which as noted is the definition of monopolistic behavior, almost all courts, including this one, have looked to the monopolist’s conduct taken as a whole rather than considering each aspect in isolation,” Sloviter wrote. “When 3M’s conduct is considered as a whole, the conclusion is inescapable that the synergistic effect of 3M’s conduct was anticompetitive,” Sloviter wrote. In addition to Mather, LePage’s was represented by attorney Jeremy Heep of Pepper Hamilton; sole practitioner Peter Hearn; and Mark W. Ryan, Kerry Lynn Edwards, Donald M. Falk, Robert L. Bronston and David A.J. Goldfine of Mayer Brown & Platt in Washington, D.C. Attorney Stephen V. Bomse of Heller Ehrman White & McAuliffe in San Francisco argued the appeal for 3M and was joined on the briefs by 3M’s trial lawyer, John G. Harkins Jr. of Harkins Cunningham in Philadelphia, and Heller Ehrman attorneys M. Laurence Popofsky, Paul Alexander and Marie L. Fiala.

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